Bond Yields’ Path Back to 2020 Highs Lies With Convexity Hedging
- Morgan Stanley see 1.43% as key level for mortgage hedging
- Convexity hedging flows could exacerbate any bond selloff
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Treasury yields’ journey back to peaks last seen before the pandemic hit the U.S. could get an added boost if they hit a level that would trigger hedging flows in the $7 trillion mortgage-backed bond market, Morgan Stanley strategists say.
They expect 10-year yields to rise to 1.80% by year-end from 1.33% as of 7:49 a.m. in New York. That view is driven partly by convexity hedging, a phenomenon where Americans sell bonds to compensate for lost interest in refinancing their old mortgages as a result of higher yields.