Treasuries May Get Shot of Adrenaline Courtesy of Mortgage Bonds
- About $1.6 trillion 10-year Treasury cash equivalent sidelined
- Millions of dollars spent Monday hedging sharp drop in yields
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A rally in Treasuries that’s driven 10-year yields close to record lows may really get going if mortgage-bond investors are forced to adjust their hedging because of the global shift in interest rates.
The abrupt slide in yields, which came as the coronavirus outbreak spurred a flight to haven assets, may deepen if the market witnesses a resurgence of so-called convexity hedging that helped weigh on rates last year. Such hedging stems from mortgage-debt holders having to adjust their exposure to interest-rate risk as lower borrowing costs spur refinancing. And while that dynamic hasn’t been a significant force in the latest bond-market rally, it may be just over the horizon if yields keep tumbling.