Wall Street Hedges Backfire as Volatility in Rates Market Sinks

A rapid plunge in US interest-rate volatility is heaping pain on a popular Wall Street approach for hedging against financial market turmoil.

In recent years, major banks have been building and selling protective quantitative investment strategies (QIS) tied to long-term expectations for swings in interest rates. The products — systematic trades packaged up as swaps for the likes of hedge funds and pensions — provide a form of insurance against major economic risks.