Mortgage-Bond Investors Eyeing Hedge Before ‘Pain Trade’ Strikes
- Protection against a rally is seen as cheap right now
- HSBC says 10-year Treasury yield could retreat later this year
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Baron Rothschild famously said “the time to buy is when there’s blood in the streets.” For mortgage-bond investors, that time may be now.
As interest rates reach multiyear highs, mortgage-backed securities traders are taking a hard look at buying protection against the so-called “pain trade” of falling bond yields. The idea is that buying up cheap hedges now will leave investors better prepared for lower rates in the future, when homeowners will be more likely to refinance, shortening the duration of bonds and pushing them to underperform.