Bravo, Jorge Miguel VenturaDuarte, David MendesLopes, Beatriz Vilarinho dos Santos2025-03-202025-03-202025-02-12http://hdl.handle.net/10362/180977Dissertation presented as the partial requirement for obtaining a Master's degree in Statistics and Information Management, specialization in Risk Analysis and ManagementThis study investigates whether interest rate swaps and German bond futures can effectively protect sovereign issuers from rising interest rates surrounding bond auction dates. The research aims to determine if using these instruments can successfully lock in the risk-free rate and shield debt management agencies from interest rate hikes leading up to auctions. The analysis employs data on benchmark bond yields from four EMU countries – Portugal, Spain, Italy, and Germany – and corresponding swap rates for various maturities, covering the period from March 2000 to December 2019. The data is categorized into bull and bear markets to refine the hedging strategies. The study excludes the period marked by the 2008 financial crisis (March 9, 2009, to August 8, 2017) due to its high volatility and focuses instead on the post-crisis period, characterized by negative interest rates. The analysis reveals that interest rate swaps provide better results than German bund futures in locking in the risk-free rate. However, both strategies show similar limitations in fully mitigating interest rate risk. While they can effectively hedge against fluctuations in the risk-free rate component of the yield curve, they leave the risk premium component, also known as the z-spread, unhedged. Consequently, both strategies' success is contingent upon the magnitude of changes in the countries' yields compared to the changes in benchmark rates. A key factor impacting the risk premium is the sensitivity of credit spreads to auction announcements, especially for Portugal and Spain. A phenomenon exacerbated by the unpredictability of auction timing and frequency, leading to increased volatility in the days leading up to auctions. Future research could explore alternative financial instruments and strategies for pre-hedging interest rate increases around auction dates. Furthermore, investigations into the liquidity, regulatory, and operational implications of employing these derivatives would provide valuable insights for debt management agencies.engSovereign debtFuturesSwapsInterest RateBondsInterest Rate RiskSDG 4 - Quality educationSDG 8 - Decent work and economic growthmaster thesis203924380