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.
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