The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site.

All material subject to strictly enforced copyright laws. © 2021 Euromoney, a part of the Euromoney Institutional Investor PLC.

Convexity hedging drives the markets

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.


At the beginning of December, five-year swap yields were around 6.5% while 10-year swap yields were at 6.7%. The five-year swap spread was around 105 basis points over US treasuries, and the 10-year swap spread was close to 120bp.


At the end of February, much has changed. Five-year swap yields are at least 80bp narrower at 5.7% and 10-year swap yields are 65bp lower at 6.05%. Five-year swap spreads have tightened some 20bp to 85bp, and 10-year swap spreads have come in to 95bp.


In part, these changes have been brought about by negative convexity hedging.




You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.

SUBSCRIBE ONLINE TODAY

Unlimited access to Euromoney.com and Asiamoney.com

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually

FREE 7 DAY TRIAL

Unlimited access to Euromoney.com and Asiamoney.com, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors

LOGIN NOW

Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree