In the first two months of this year there has been a dramatic reconfiguration of market variables in the US, including interest rates, credit spreads and the yield curve. Both a result of and contributing to these seismic shifts in the financial landscape has been business completed by mortgage portfolios to hedge negative convexity. Dealers have been rocked on their feet by the scale of volatility buying, and the fear that if rates back up, the mortgage holders will unwind the positions and sell convexity, making any general market sell-off much more severe than would otherwise be the case.
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