Hidden liquidity, governance, and regime risks in long-dated hedging
Rates hedging programmes often appear successful by conventional measures. Duration is neutralised, reported volatility is controlled, hedge accounting holds, and outcomes remain stable across reporting periods.
Yet, many of these hedges still break portfolios over time.
The issue is rarely forecasting accuracy or execution. In many cases, interest rates behave broadly as expected, and the hedge performs exactly as designed. The failure is structural. Familiar hedges are often built to optimise short-term optics while deferring the risks that dominate outcomes over time – liquidity strain, funding persistence, collateral dynamics, and governance intervention under stress.
This piece examines why hedges that look correct on paper can quietly become fragile as exposure persists across regimes. It shows how volatility suppression can coexist with rising economic risk, why familiar instruments defer rather than resolve uncertainty, and how governance incentives shape outcomes in ways that only become visible when conditions change.
The focus is judgement, not prescription. It is intended to help distinguish between hedges that are structurally survivable and those that depend on continued favourable conditions.
A rates hedge behaves only if it delivers its intended economic outcome across regimes without forcing action at the wrong moment. This explains why many “successful” hedges do not.
Read the CIO Brief
Why “Successful” Rates Hedges Still Break