How US mortgage bonds can trigger a 'vicious loop' for Treasury yields
The article explains how US agency mortgage-backed securities (MBS), a ~$7tn market, have 'negative convexity' that forces portfolio managers to sell bonds precisely when markets are already falling, amplifying Treasury yield spikes. As yields rise, MBS duration increases, compelling holders to offload Treasuries to maintain their target risk levels, creating a self-reinforcing 'vicious loop' of selling. However, with 30-year mortgage rates now around 7.28%, prepayment optionality is nearly worthless, meaning MBS are behaving more like normal bonds and this mechanical selling pressure may…