It has been a rough roller-coaster ride for the US
treasuries market over the past three months, and there are
sure to be financial institutions hurting as a
result.
Bog-standard prop trading losses will cause some of the pain.
But it is banks' addiction to mortgage product over the past 18
months that could cause the real damage. It's not the easiest
product to hedge at the best of times. There are two basic choices
- sell treasuries or sell the swap - but in the kind of whiplash
treasury markets of late it is nigh on impossible to hedge
effectively.
As recently as mid-May, the yield on the 10-year bond was
hovering close to 3%, the lowest in more than 50 years, having
tightened almost a full percentage point in a month.
By the end of July the 10-year...
