Mish, Ok know you've looked at this, but if mortgage convexity and duration extension is taking off, how will that play out in Treasuries? Wouldn't that tend to force selling in the long end, say 5 years and out, but possibly result in a scramble for shorter Treasuries (*), say 3 and under, as short duration mortgage backed disappears (because of extension of duration, caused by fewer refis and transactions). In otherwords big curve steepening caused by a glut of longer dates, and fewer shorter or more accurately a disappearance of short maturities? All of a sudden, mortgage holders are going to own long duration portfolio, and of poorer credit.
If so the paper to own would be T-Bills and 2 years, possibly 3 years. In the later, one would wait for prepayments to really tank (say below 1500 refi), avoiding anything longer.
Can you find out how much mortgage duration has blown out in the last several weeks, especially this week? This could get interesting.
(*) relatively, since the FCB activity has to be taken into account. FCB may have bought agencies ($391.6 billion), because they like short maturities, and now find they have longer maturities. |
