MBS convexity hedging: back with a vengeance, or ghost story?
More bonds now sit with active hedgers but market is split on whether flows can move US rates again
Back in the early 2000s, the US rates markets were at the mercy of mortgage-backed securities (MBSs). The holders were active hedgers and as underlying rates moved, it led to a flood of trades that could have an impact on the markets underpinning them.
As these MBSs passed into the hands of passive, non-hedgers like the Fed post-2008 and then after the Covid pandemic, that effect dimmed. But as the Fed’s balance sheet runoff puts the bonds into new hands, combined with higher mortgage interest
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