Negative Convexity
June 2nd, 2009 1:04 pm | by John Jansen |Here is an excerpt from a dealer piece on the amount of negative convexity in the market. To translate,the dealer firm is estimating that if there was a parallel shift in the curve in which rates rise 25 basis points,that would be as if $ 149 billion 10 year notes appeared in the market place. Here is the relevant portion :
As far as the agency passthrough market is concerned, we are at the point of
maximum negative convexity at the moment (Figure 2). We estimate that 30-year
agency passthrough universe will extend by $149 billion 10-year Treasury
equivalents for a 25bps backup (parallel shift) in rates. Note that the change in duration of the 30-year passthrough universe for a 25 bps change in interest rates is a lot higher than that of corresponding MSRs, but only a small portion of negative convexity risk in agency passthroughs is actively hedged (only about 10%-15% of the risk) while almost all the negative convexity risk in MSRs is hedged fairly actively.
6 Responses to “Negative Convexity”
By Bman on Jun 2, 2009 | Reply
wow – if speeds have truly slowed that much, I would not be surprised to hear helicopter rotors again soon.
By Les on Jun 2, 2009 | Reply
I am truly trying to understand this post; is what the author trying to say: if MBS rates rise another 25 bps, holders will need to sell $149 billion of 10 – year Treasuries to hedge their positions ?
If not, please entlighten me. Thanks.
By John Jansen on Jun 2, 2009 | Reply
Yes. It is as if $ 149 billion 10 year treasuries hot the street, according to the assumptions of that firm.
By Les on Jun 2, 2009 | Reply
Well, that would certainly support my TYO position.
Thanks.