Interest rates are inevitably headed higher as the Federal Reserve ends its bond buying program, and recent history has shown that, when this happens, the move can be swift and ugly.

The Chicago Board Options Exchange (CBOE) has launched a product designed to allow fixed-income investors to hedge against interest-rate volatility, similar to its equity volatility index that is now widely used by investors seeking to hedge or trade equity-market volatility. The CBOE/CBOT 10-year Treasury Note Volatility Index (VXTYN) began trading in mid-November. It allows fixed-income investors, particularly investors in rate-sensitive bonds such as residential mortgage-backed securities (RMBS), to hedge for the first time pure interest-rate volatility risk based on U.S. government debt with a single product.

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