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.

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  1. 6 Responses to “Negative Convexity”

  2. 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.

  3. 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.

  4. 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.

  5. By Les on Jun 2, 2009 | Reply

    Well, that would certainly support my TYO position.


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