Under the right set of circumstances, municipal interest rate swaps can be very effective instruments for state and local government debt management and investment programs. Increasingly, as financial adviser to these governments, we are being asked to suggest and evaluate alternative interest rate swap approaches. If designed properly, reliance on interest rate swaps can outweigh the risks, which are often rather minimal, attendant to this product.
The application of swaps can be quite varied. For example, swaps represent a debt management tool that can be used for diversifying a borrower's standard practices, including an adjustment in fixed-rate debt by increasing the amount of floating-rate indebtedness: often, this adjustment can be achieved more easily and simply through swaps than through the direct issuance of variable-rate debt.