Volatility Returns: Opportunity in the Swings

The past six weeks have brought a sharp pickup in volatility across markets, driven by shifting central bank expectations and a repricing of inflation. For borrowers, the moves have changed both the cost of protection and the case for putting it in place.

Volatility cuts both ways. Caps and collars get more expensive, but the risks they protect against get more real. Here, we look at how volatility has moved, what it has meant for pricing, and where the opportunities lie.

Labour Under Pressure, Markets on Edge

Last week’s local elections added a fresh layer of volatility. Labour suffered heavy losses, Reform UK made historic gains, and Starmer’s leadership is now under serious pressure, with dozens of Labour MPs calling for him to go. Wes Streeting formally resigned as health secretary ahead of an anticipated leadership challenge.

The political uncertainty has reignited questions over fiscal direction and borrowing, pushing gilt yields and swap rates higher and feeding directly into cap premiums.

Banks have responded by widening trading spreads materially — one client has seen bank spreads move by 300% in the last six days, a stark reminder of how fast execution costs can shift when volatility picks up.

Markets Have Repriced Sharply

The shift in market pricing is clearly visible in swap markets. Since 03 March, both the 3-year and 5-year tenors have moved materially higher:

The GBP 3-year swap rate has risen from 3.55% on 03 March to around 4.24% today, an increase of 20%.
The GBP 5-year swap rate has risen from 3.65% on 03 March to around 4.26% today, an increase of 17%.

Higher swap rates and greater volatility have also pushed up cap pricing. Looking at indicative mid-market pricing for a £5m SONIA cap today versus 03 March, premiums have increased materially.

The 5-year 4% cap has risen by 347%, from c.£19k to c.£85k
The 3-year 4% cap has risen by 137%, from c.£70k to c.£166k

The past month has seen dramatic moves in UK government bond markets.

The 10-year gilt yield broke above 5% for the first time in nearly two decades
The 30-year yield briefly touched 5.81%, its highest level since 1998.

What This Means for Borrowers

For borrowers with floating rate debt, this shows how quickly swap and cap pricing can move when volatility picks up, and why delaying protection can prove costly. Those who waited are now paying more to hedge, and with political and monetary uncertainty unresolved, holding out for clarity carries real risk.

In this market climate, negotiating tight spreads with your bank or hedge counterparty is more important than ever. At Vedanta Hedging, we work to ensure clients are receiving fair pricing and competitive spreads. If you are considering interest rate hedging to protect against rising rates, feel free to reach out.

Next Steps

To view current market rates, see our Daily Market Rates sheet.
Want to learn more about interest rate hedging? Get in touch and a member of our team will assist you.
If you haven’t already, read our recent article called Banks hold Interest Rates But Hedging Costs Keep Rising.

You can reach us on 0207 183 2277 or at info@vedantahedging.com