‘Convexity Hedging Beast’ Blamed for Lower Bond Yields
- Plunging yields bring out mortgage, option and insurance flows
- Flow comparable to what was triggered by 2008 crisis: JPMorgan
This article is for subscribers only.
Analysts and traders are blaming an increasingly familiar culprit for last week’s plunge in bond yields -- and they’re asking if it’s just the beginning.
At issue is the relationship between bond yields and the impact of their decline on different portfolios. For large investors who hold mortgages, like money managers and banks, a drop in rates means the duration of these portfolios tends to fall since mortgages have negative convexity. This leaves the holders scrambling to compensate by adding duration to their holdings in a phenomenon known as “convexity hedging.”