MBS Day Ahead: The Upside of Horrible Bond Market Weakness

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Posted To: MBS Commentary

It's going to be a while until we can truly sort out whether the current bout of bond market weakness is the same sort of correction seen in early 2015 (i.e. almost done) or if it will be more like mid-2013 (i.e. just getting warmed up). Of course there's always an outside chance that a sell-off could be even bigger–as many have feared for years–but I'll believe in that possibility after I see it happen (rising rates require rising growth, inflation, and government borrowing, so you'll forgive me if I'm skeptical about 2 of those 3 components). If a sell-off were to truly get out of control , it would reach a point where it was disproportionately bad for lower MBS coupons. This is due to the concept of negative convexity, which is a confusing way to say that investors…(read more)

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