Strategic Hedging of a Bond Portfolio

Structural tensions along the US yield curve call for a defensive and proactive approach to bond portfolio management, especially for portfolios exposed to long durations.

Using the right strategy could reduce volatility in US bond portfolios by targeting a specific duration.

MOVE Index: US rate volatility on high alert

The MOVE Index (Merrill Lynch Option Volatility Estimate) is the bond market equivalent of the VIX.

It measures expected volatility on US Treasuries (2, 5, 10, and 30 years) using option prices on interest rates.

An elevated reading (above 120) indicates significant stress in rate markets, often tied to monetary shocks or liquidity disruptions.

The MOVE Index currently stands around 115, down from 138 at the beginning of the week, yet remains near historically elevated levels—reflecting persistent uncertainty about the future path of long-term U.S. interest rates.

Inflation risk resurgence via tariff hikes

The Trump 2.0 administration plans a significant increase in import tariffs, which exerts direct upward pressure on consumer prices.

This relationship is quantified by a transmission coefficient:

 Tariff-to-CPI transmission coefficient: 0.2

Based on 20 years of historical US data, this coefficient indicates that a +10% tariff increase typically results in a +2% rise in CPI inflation.

An inflation level of 4–6% would make any monetary pivot difficult, anchoring long-term rates higher and for longer than expected.

Refinancing wall: a major stress factor

Nearly USD 9 trillion in US sovereign debt is scheduled to be refinanced in 2025.

In a context of upward pressure on the yield curve, this creates the risk of a self-reinforcing rise in yields and financing costs.