Interest rates: direction dilemmas

The final quarter of 2009 saw product creators gripped by uncertainty over which way interest rates were heading. With a steep yield curve making investment in rates products expensive, bankers are seeking the best trade for uncertain times. Will the trend towards dynamic strategies provide an answer? By Sophia Morrell

One of the less dramatic elements of the recent chaos in financial markets was the movement of interest rates. In a bid to head off the credit crisis, central banks across the world reduced their lending rates to record lows, reaching 0-0.25% in the US and 1% in the eurozone. In Japan, where the central bank rate has been kept low for many years, the level was maintained at a floor-scraping 0.1%.

As sentiment improved during last year’s slow recovery, structured product providers began to seek