The Bank of England’s Mann emphasises that inflation continues to pose a challenge. The central bank remains committed to using monetary policy tools to achieve its 2% inflation target.

UK bond yields are on the rise, with the 30-year gilt yield reversing an earlier decline. It has increased by five basis points, reaching 5.478%. The 10-year gilt yield has also climbed by 4.7 basis points, now at 4.640%, after previously reaching a low of 4.556%.

Rising US Bond Yields

In the US, the 10-year yield is rising, currently up 4.4 basis points at 4.471%. This marks its highest level since June 11. The 30-year yield in the US has risen by 3.2 basis points, surpassing the 5% threshold to reach 5.004%. This level has not been seen since May 29.

Market dynamics continue to be influenced by tariff discussions and inflationary pressures.

It seems Mann is reminding everyone that the fight isn’t over. We’re watching yields climb on both sides of the Atlantic, not just because of her hawkish tone, but because the market is finally waking up to a risk we’ve been flagging for months. While the UK’s latest headline CPI print did touch a tidy 2.0%, a three-year low, the Bank is clearly looking past that one data point and focusing on the stickier, more persistent service inflation which remains stubbornly high. This explains why they are hesitant to cut.

Across the pond, the story is similar but magnified. The US 10-year yield breaking back above 4.7% tells us the bond market is getting nervous. The core of this anxiety is the dawning realization of what new, broad-based tariffs would mean for inflation. We aren’t talking about small, targeted levies anymore. The discussions are centered around potential double-digit tariffs on all imports, a move that would act as a direct and immediate tax on consumers and businesses. Think back to the 2018-2019 trade war; research from the National Bureau of Economic Research showed that US consumers bore virtually the entire cost of those tariffs through higher prices. A new, broader round would dwarf that impact.

Market Positioning Strategies

So, how do we position ourselves? The era of cheap volatility feels dangerously complacent. The VIX index has been languishing in the low teens, which is historically cheap insurance given the storm clouds gathering. We see this as a clear opportunity to buy 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 positions are inexpensive right now and offer explosive upside if this tariff-driven inflation scenario materializes, forcing the Fed to abandon any notion of rate cuts in 2024.

Furthermore, the recent rally in bonds looks like a classic bull trap. With yields reversing sharply, we believe the path of least resistance is higher. This means it’s time to consider trades that profit from falling bond prices. We are exploring put options on Treasury futures, like the ZN and ZB contracts, or entering payer interest rate swaps to hedge against, or speculate on, a sustained move up in rates. The market has been desperate for a dovish pivot, but the math on tariffs simply doesn’t allow for one.

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