Negative convexity

When rates fall, mortgage borrowers refinance, so the bond shortens exactly when a longer bond would have gained most.

• Macro and rates
• Credit

1 idea that carry it

• FrameworkMacro and ratesResearch

  Mortgage bonds shorten exactly when you least want them to

  A prepayable bond gets shorter when rates fall and longer when they rise; the spread you are paid is for that asymmetry.

  Fixed income, securitised products and mortgage finance interviews, and any question about why mortgage rates move with MBS rather than the policy rate.

  From Mortgage-Backed Securities · Andreas Fuster, David O. Lucca and James Vickery, Federal Reserve Bank of New York (Staff Reports)