Since the outbreak of the Iran war, the macro backdrop has been fundamentally redrawn. What began the year as a relatively predictable path for global interest rates has been decisively rerouted. Risk managers who expect a return to a period of calm are increasingly likely to be disappointed. This Risk Insights looks at the likely impacts of the ongoing turbulence in three markets.

UK: Volatility Amplified by Fragility

The UK may find itself in the worst position of the three jurisdictions discussed in this piece. Even prior to the war, inflation was running uncomfortably hot. The subsequent surge in energy and commodity prices has only exacerbated this dynamic, forcing a significant repricing of the rates outlook.

• Pre-war pricing: 2 cuts
• Peak post-war pricing: 3 hikes
• Current pricing: 1 hike.

This repricing has been accompanied by a step-change in volatility. Where two-year rates previously moved in a tight range, with daily shifts rarely exceeding 5bps, post-war conditions have seen moves as large as 30bps in a single session. Realized volatility has similarly jumped from roughly 2bps/day to closer to 10bps/day, underscoring just how disorderly the market has become.

The Bank of England’s (BoE) March decision to hold rates at 3.75% acknowledged the issue directly, highlighting the inflationary impulse from higher energy prices. Crucially, the MPC made its focus clear: preventing second-round effects via wages and pricing behavior.

Eurozone: Room to Cautiously Hike

The Eurozone faces a similar energy-driven shock, but from a different starting point. Having largely completed its cutting cycle pre-war, the European Central Bank (ECB) has more flexibility to respond with hikes.

• Pre-war pricing: 0.5 cuts
• Peak post-war pricing: 3 hikes
• Current pricing: 2 hikes

Volatility has followed a similar trajectory to the UK, albeit marginally less extreme. Daily moves in two-year rates, once capped around 3bps, have extended to as much as 24bps post-war. Realized volatility has risen sharply from around 2bps/day to approximately 9.5bps/day, reflecting a market grappling with rapidly shifting expectations.

The ECB has struck a more balanced tone than the BoE. While acknowledging “significantly more uncertain” conditions, it has highlighted both upside inflation risks and downside growth risks.

US: Orderly Repricing, Structural Resilience

The US has seen a similar directional shift in rate expectations - but in a far more orderly fashion.

• Pre-war pricing: 2.5 cuts
• Peak post-war pricing: 0.5 hikes
• Current pricing: 0.5 cuts

In contrast to the UK and EU, volatility has remained relatively contained. Daily moves in two-year rates have held around 10bps both before and after the war, while realized volatility has only edged higher from roughly 3bps/day to around 5bps/day. This reflects both the depth of US rates markets and the economy’s relative insulation from the direct effects of the conflict.

The Federal Reserve has maintained a flexible stance. Holding rates at 3.5%–3.75% in March, it emphasized uncertainty and a balanced view of risks.

Positioning for a Volatile Regime

If the first quarter of the year has taught us anything, it is that volatility is here to stay. The combination of geopolitical risk, energy-driven inflation shocks, and uncertain central bank responses creates an environment where markets can, and will, move quickly.

For risk managers, that means planning for sustained volatility rather than hoping for mean reversion; ensuring sufficient flexibility to respond to rapid market shifts; and ensuring they have structures in place to ensure competitive pricing and implementation when markets are at their most volatile.

This is where preparation becomes critical. At Validus, we are seeing increasing demand for support across:

• Constructing robust and adaptable hedging policies
• Selecting the right products for specific risk profiles
• Streamlining execution through pre-prepared documentation and strong banking relationships

In a market defined by uncertainty, the ability to act decisively is a competitive advantage.