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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: Haim R. Branisteanu who wrote (31872)6/11/2005 1:54:28 PM
From: regli  Read Replies (1) of 116555
 
I came across this quote from Contrary Investor. I think it is quite interesting.

Fourth, we may be bordering on yet another brush with the influence of convexity in mortgage portfolios given 10 year UST yield movement over the past few weeks. Without presenting a treatise on mortgage bond portfolio management, as longer term interest rates descend, academically mortgage prepayments usually rise due to the ability to refinance. Although we have certainly not yet seen an explosion, or even mini explosion, in refi activity, in anticipation of this possibility, many a mortgage portfolio manager will look to "extend duration" ( lengthen the maturity of their portfolios ) in order to maintain the integrity of their portfolios. In plain English, this means that mortgage backed securities portfolio managers actually need to accumulate additional long maturity assets such as the ten year Treasury as interest rates decline. As you know, this type of decision has nothing to do with whether the 10 year is fundamentally attractive in and of itself, but rather how a long duration asset fits into overall strategic portfolio management. In other words, the action of buying the 10 year is a by product or a hedge as opposed to being based on a proactive fundamental attraction.
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