The Bank of England’s Mann highlights that inflation remains a challenge. The central bank is dedicated to utilizing monetary policy to meet its 2% inflation target. UK bond yields are rising, with the 30-year gilt yield increasing by five basis points to 5.478%, reversing an earlier drop. The 10-year gilt yield climbed by 4.7 basis points, now at 4.640%, after hitting a low of 4.556%.

Rising US Bond Yields

In the US, the 10-year yield is up 4.4 basis points to 4.471%, the highest level since June 11. The 30-year yield has increased by 3.2 basis points, crossing the 5% mark to reach 5.004%, a level not seen since May 29. Market dynamics are still affected by tariff discussions and inflation concerns. Mann appears to remind us that the struggle against inflation isn’t over. Yields are rising on both sides of the Atlantic, influenced not only by her firm stance but also because the market is becoming aware of risks we’ve been highlighting for months. While the UK’s latest consumer price index (CPI) did hit a low of 2.0%, the Bank is focusing on more persistent service inflation, which remains high. This explains their reluctance to cut rates. In the US, the situation is similar but more pronounced. The 10-year yield moving above 4.7% indicates that the bond market is getting jittery. The core of this concern lies in the realization of what broad tariffs could do to inflation. We’re no longer discussing small, targeted levies. Instead, the conversation is about potential double-digit tariffs on all imports, which would act as an immediate tax on consumers and businesses. Reflecting on the 2018-2019 trade war, research showed that US consumers paid almost all the costs of those tariffs through higher prices. A new, broader round of tariffs could have an even bigger impact.

Market Positioning Strategies

So, how should we position ourselves? The current environment of cheap volatility seems overly relaxed. The VIX index has been hovering in the low teens, offering historically cheap protection against rising uncertainty. We see this as a clear opportunity to obtain protection. We are looking at long-dated call options on the VIX or put options on major equity indices like the S&P 500. These options are inexpensive now and could provide significant gains if tariff-driven inflation forces the Fed to rethink rate cuts in 2024. Moreover, the recent bond rally looks like a classic bull trap. With yields reversing sharply, we think the path of least resistance is upwards. This suggests it’s time to explore trades that benefit from falling bond prices. We are considering put options on Treasury futures, such as ZN and ZB contracts, or entering payer interest rate swaps to hedge against or speculate on a continued rise in rates. The market seems eager for a dovish pivot, but the reality of tariffs doesn’t support one. Create your live VT Markets account and start trading now.

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