What action is recommended if the basis point value of assets is less than that of liabilities during rising rates?

In a situation where the basis point value of assets is less than that of liabilities during periods of rising interest rates, doing nothing is not typically a recommended strategy. Instead, the recommended action would generally involve taking measures to mitigate interest rate risk.

When interest rates rise, the value of fixed income liabilities typically decreases at a different rate compared to assets. If the liabilities have a greater sensitivity to interest rate changes (greater basis point value), it can create an unfavorable financial situation.

Utilizing hedging strategies such as buying interest rate swaps to pay fixed or long futures can provide a protective measure against further declines in the values of assets relative to liabilities. Such hedging would help align the sensitivity of the balance sheet to rising rates, helping reduce the potential for losses.

In summary, while the option of doing nothing may initially seem appealing, it ignores the inherent risks of rising interest rates in a situation where asset values may decline more steeply than liabilities due to their relative sensitivity. Therefore, an active response to adjust the interest rate exposure is often necessary to safeguard against negative financial impacts.