Structural mistakes, familiar tools, and regime risk deferred
Rates hedging is often treated as a problem of measurement and control. Duration is neutralised, sensitivities are reduced, and exposure is assumed to be “taken off the table”. In practice, that framing is incomplete.
Many rates hedges perform exactly as designed and still fail economically. Short-term volatility is suppressed while risk is deferred into cashflows, collateral dynamics, funding dependence, and future governance decisions. These risks remain quiet in benign conditions and become binding only once time and regime change remove flexibility.
What determines outcomes is not pricing, DV01, or instrument familiarity, but behaviour. Familiar tools tend to relocate risk rather than eliminate it, shifting interest-rate exposure into liquidity and governance channels that dominate over longer horizons.
This is why rates hedges often deteriorate even when rates behave broadly as expected. Rolling structures create path dependency rather than flexibility, collateral becomes the primary transmission channel for stress, and hedges frequently turn into sources of instability at the point they are meant to protect.
Read the practitioner paper
Why Rates Hedges Don’t Behave