theglobeandmail.com
Convexity Buying Amplifies Decline in U.S. Treasury Yields
The recent drop in U.S. Treasury yields is partly due to "convexity buying" by mortgage managers and insurers to hedge against negative convexity from mortgage refinancing, amplifying yield declines and tightening swap spreads; this is despite active MBS hedgers falling to 6% from 27% in 2002.
- What is the primary factor contributing to the recent decline in U.S. Treasury yields, and what are its immediate consequences?
- Recent drops in U.S. Treasury yields are partly due to "convexity buying" by mortgage portfolio managers and insurance companies to offset the effects of mortgage refinancing. This buying amplifies yield declines, especially given recent economic growth concerns. The benchmark 10-year yield, impacting borrowing costs, fell 18 bps from March 13 to March 20, reaching 4.17%.
- How does negative convexity in mortgage-backed securities (MBS) influence the actions of investors, and what specific instruments do they use to hedge against it?
- Mortgage players and insurers buy Treasuries or interest rate swaps to hedge against negative convexity from mortgage prepayments when rates fall. This buying increases demand for fixed-rate assets, further lowering yields. The tightening spread between 10-year swaps and Treasury yields, reaching -44 bps on Monday, reflects this increased demand.
- What are the potential longer-term implications of increased convexity hedging on Treasury yields and the broader financial markets, considering factors such as policy uncertainty?
- Elevated implied volatility in longer-dated swaptions suggests anticipation of further rate declines and continued convexity hedging. While active MBS hedgers have decreased to 6% from a peak of 27% in 2002, the impact of this recent buying remains significant, particularly given policy uncertainty surrounding trade and tariffs.
Cognitive Concepts
Framing Bias
The article frames the drop in Treasury yields primarily through the lens of convexity buying by mortgage portfolio managers and insurance companies. While other factors might be at play, the emphasis on this specific aspect shapes the reader's interpretation towards this explanation as a major, if not primary, cause. The introductory paragraph directly connects the yield drop to this specific buying activity, setting the stage for the rest of the narrative.
Language Bias
The language used is mostly neutral and factual, employing financial jargon appropriate for the topic. However, phrases such as "wave of buying" and "amplify the decline" might subtly suggest a more dramatic impact than strictly supported by the data. More neutral alternatives could be 'significant purchases' and 'contribute to the decline', respectively.
Bias by Omission
The article focuses heavily on the actions of mortgage portfolio managers and insurance companies, and their impact on Treasury yields. However, it omits discussion of other potential factors contributing to the yield drop, such as global economic conditions, central bank policies, or investor sentiment unrelated to convexity hedging. While acknowledging that active MBS hedgers have dwindled, the article doesn't quantify the overall impact of these omitted factors. This omission limits the reader's ability to form a complete understanding of the yield decline.