Adam posted on Thursday on the tumultuous selling in US bonds:


  • "There's also very good argument that convexity hedging in the mortgage market combined with dealer selling after the auction is responsible for a good chunk of this move."

Bloomberg have a piece up on the ...

In (VERY) brief:

  • when Treasury yields suddenly rise sharply ... mortgage-bond investors are left waiting for longer to collect payments on their investments
  • The longer the wait, the more financial pain they feel
  • Their answer: unload the Treasury bonds they hold with long maturities or adjust derivatives positions -- a phenomenon known as convexity hedging

Check out that link above (this one: forced sellers) for more detail.