MBS Convexity Hedging Resurges; 2 Trillion USD High-Rate Mortgages Fuel Long-Bond Volatility Last Month

According to Bloomberg reporting on Morgan Stanley observations, mortgage-backed securities (MBS) investors last month engaged in large-scale convexity hedging as long-dated Treasury yields approached 19-year highs, driving significant selling pressure in Treasury futures. Goldman Sachs estimates the additional hedging positions required following the debt market selloff amounted to approximately $40 billion of 10-year equivalent Treasuries.

Barclays data shows that MBS with coupon rates exceeding 5% now exceed $2 trillion, roughly quadruple the level three years prior. This heightened sensitivity to yield fluctuations has forced investors to adjust hedges more frequently, particularly as roughly one-third of outstanding MBS have returned to near-par valuations—the zone of highest convexity sensitivity—intensifying the market's vulnerability to amplified rate swings.