Treasury Lock

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Treasury Lock

A derivative whereby one guarantees oneself a particular yield on a Treasury security. That is, one purchases a Treasury lock for a certain price; if the actual price of the designated Treasury security is higher than the price of the lock, the buyer must pay the difference. On the other hand, if price is lower than the price of the lock, the buyer receives the difference. One buys a Treasury lock when a certain yield is important to his/her investment strategy but there is uncertainty on the future direction of Treasury yields. Treasury locks are settled in cash.
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Best has observed that some insurers have begun to prepare for the impact of a rising interest rate environment by using hedging techniques such as Treasury locks or by reducing the average duration of their bond portfolios.
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