HALISTER1: UST 10Y Yield Could Rise to 3% on MBS Convexity Flows, TD Says

UST 10Y Yield Could Rise to 3% on MBS Convexity Flows, TD Says

(Bloomberg) -- If fair value argues for 10Y yield to reach 2.75%, it may “very well overshoot” to 3% as convexity hedging tends to exacerbate selloffs, TD strategists Priya Misra, Gennadiy Goldberg and Cheng Chen say in note.
  • A “significant move” in rates in one direction over a short period of time “would tend to create greater hedging needs”
  • Any convexity paying may push rates higher, led by 5-7yr sector
  • Every 10bp rise in interest rates may create est. $10b in 10yr equivalents of MBS convexity paying
    • Post-election has seen an est. $46b in 10yr equivalents in MBS convexity paying needs amid 50bp rise in yields
  • Estimate based on assumption of hedging by most originator pipelines, 50% of MSR portfolios and 35% of MBS holders
  • Any further selloff in rates, which would spark “more convexity paying needs,” may be accompanied by more talk of deficit increases, so swap spreads could find it “more difficult to widen”
    • Spreads tend to widen when there are convexity flows
  • Recommend 5s30s spread curve flatteners since convexity paying may occur in the belly of the curve and deficit impact will be felt “more in the long end”
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Cheng Cheng (Pacific Crest Securities LLC)
Gennadiy Goldberg (TD Securities USA LLC)
Priya Misra (TD Securities USA LLC)

Topics
To Be Announced Securities

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