Hedging of mortgage-backed securities

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On Wednesday, 14 August 2019, the 10-year yield dropped below the 2-year yield for the first time since before the credit crisis, leading to an inverted yield curve. Throughout August, yields across all maturities dropped quite dramatically, leading to a rally in the bond market. On 3 September 2019, the Wall Street Journal ran a story about the bond market rally and wrote: "Analysts trying to make sense of the steep slide in bond yields around the world in August are pointing fingers at many things, including slowing global growth and a prolonged trade fight. Some also are attributing yields' push lower to a less easily explained phenomenon: hedging against "negative convexity" in the mortgage market." Discuss how hedging of mortgage-backed securities (MBS) could lead to lower long-term yields.

Reference no: EM133121504

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