An Update on MBS Underperformance vs Treasuries

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Posted To: MBS Commentary

Duration is a key variable in deciding value to bond investors investors. In fact, many investors have a duration target for their portfolio. Duration changes differently for MBS vs Treasuries, and this contributes to differences in relative performance (e.g. when you see MBS not gaining as much ground as Treasuries during a rally). A 10yr Treasury note will always have a 10yr duration (or more specifically, a predictably declining duration as time goes by). As rates rise, investors want less duration because they could get higher rates of return with newer debt. Whereas the duration of any 10yr Treasury note will be what it will be regardless of rising rates, the duration of the average mortgage would be getting longer (owners less likely to refi out of a below-market rate, and possibly even…(read more)

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