Weekly Real Estate News
Rising Treasury yields have prompted investors in mortgage-backed securities to adjust interest-rate hedges, potentially adding to bond-market selling pressure and complicating the outlook for mortgage rates.
A Reuters analysis published October 12 described how higher borrowing costs reduce homeowners’ incentives to refinance. When expected prepayments slow, mortgage bonds can remain outstanding longer than investors anticipated, increasing their sensitivity to rate movements.
Why convexity hedging matters
Mortgage investors may respond by selling Treasury futures, paying fixed rates in interest-rate swaps or otherwise adjusting portfolios. This activity, known as convexity hedging, can reinforce an existing rise in yields. It is not the only driver of Treasury volatility, and market participants disagree about the size of its contribution.
Reuters reported that benchmark 10-year Treasury yields had risen about 130 basis points since late February, while 30-year yields increased about 100 basis points. Inflation concerns, oil prices and expectations for Federal Reserve policy have also influenced those moves.
Mortgage rates are tied more closely to longer-term funding markets and mortgage-backed securities pricing than to the Fed’s overnight policy rate alone. For lenders and borrowers, hedging dynamics are one reason rates can move sharply even before a central-bank decision.
Analysts caution that the current mortgage market differs from previous episodes of severe convexity-driven selling, so the hedging effect should not be overstated.
