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Strategies & Market Trends : Ask DrBob -- Ignore unavailable to you. Want to Upgrade?

To: eichler who wrote (33536)	5/14/2001 10:30:52 AM
From: longdong_63	Respond to of 100058

9:12 AM MORTGAGE TALK: Throughout the past few days and the last few weeks in general there has been repeated talk of mortgage-related selling of U.S. Treasuries. The selling that has taken place is referred to as "convexity" selling. In other words: forced selling. When interest rates rise, housing turnover decreases as home sales and refinancings fall in response to higher mortgage rates. In turn, mortgages get paid off less frequently. These so-called "pre-payments" have a direct impact on portfolios that hold mortgage securities. Falling pre-payments reduce the level of cash injections that come from mortgage pre-payments, and this leaves mortgage portfolios with more securities (and risk) than desirable. Thus, the main dilemma that mortgage portfolio managers face is pre-payment risk. When yields were falling, mortgage portfolio managers were big buyers of Treasuries, as they needed to offset the risk of falling interest rates. (as interest rates fall, mortgages get prepaid at a faster pace, resulting in the injection of cash into mortgage portfolios. Mortgage portfolios therefore ran the risk of having too much cash that would get reinvested at lower and lower interest rates). To guard against the risk of rising interest rates, mortgage portfolio managers sell U.S. Treasuries to assure that they will not get stuck with too many securities falling in price. By selling the treasuries they previously bought, or, in some cases, by selling Treasuries short, mortgage portfolio managers reduce the risk that they will be caught with extremely long portfolios. Pre-payments have been extremely high this year, owing to high levels of housing turnover (a record in March) and mortgage refinancing (running 6 times faster than 2000).