The mortgage hedging 'beast' is back in the Treasury market, reviving convexity-driven flows that amplify yield swings. The article details how MBS investors' hedging needs can whipsaw US government bonds, adding to rate volatility and complicating Fed policy transmission. The phenomenon retreated in recent years but reemerges as rate uncertainty persists.
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The article explicitly discusses the return of mortgage hedging in the Treasury market. As MBS hedging flows return, US10Y yields are likely to experience amplified moves in both directions, with the net effect dependent on rate trends. The 'beast' signals higher volatility and a potential for sharper yield swings.
Catalysts
- • Resurgent mortgage hedging flows directly impacting Treasury market liquidity and yield dynamics.
- • Increased rate uncertainty driving MBS duration hedging needs.
Risk Factors
- • If interest rates stabilize, mortgage hedging activity may diminish, limiting yield impact.
- • Fed liquidity measures or yield curve control could counteract hedging-driven volatility.
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What direction does the mortgage hedging beast push Treasury yields?
It amplifies the prevailing trend. In a falling rate environment, hedging adds buying pressure, pushing yields lower. In a rising rate environment, it adds selling pressure, pushing yields higher. The net directional impact depends on the broader rate outlook.
How significant is the impact of mortgage hedging on US10Y?
Historically, during episodes of intense hedging, it can account for significant intraday yield moves, sometimes exceeding 20 basis points in a single session. The impact is most pronounced when MBS durations are highly sensitive to rate changes, a condition that typically occurs when rates are near historical lows or breaking trend.