Sunday, May 31, 2009

Mortgage convexity behind the fall in treasurys?

Voltron says: according to a recent article in Barron's, the recent drop in treasury prices is due to banks selling a trillion dollars worth of treasurys they were using to hedge mortgage pre-payment risk. In typical Barron's style they declare that this adjustment is over (so there is no way to profit from this information at this point). I think that the treasurys used as hedges were also sold as mortgages defaulted. This is due to resume shortly and continue for the next couple of years. Even more reason to be short TLT...

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