Convexity hedging
Fixed IncomeDefinition
Mechanical bond buying or selling driven by mortgage portfolios. As rates move, MBS duration changes (because prepayment expectations shift). MBS holders rebalance their hedges by trading Treasuries — amplifying rate moves on big swings.
The 1994, 2003, and 2022 bond selloffs were each amplified by convexity hedging selling waves. Trade desks watch the "cliff" levels where MBS hedging will trigger.
The 1994, 2003, and 2022 bond selloffs were each amplified by convexity hedging selling waves. Trade desks watch the "cliff" levels where MBS hedging will trigger.