Hey guys, I was reading through the ‘Hedging mortgage securities to capture relative value’ in schweser and came across the following which isn’t clear to me: Positive convexity means that for each successive -dy (decrease in yield) -> duration increases. Negative convexity means that for each successive -dy (decrease in yield) -> duration decreases. Could someone explain why this is so?
just look at the shape of the price-yield curve… for + convexity, the slope of price-yield increases as yield decr. since duration is slope of price-yield curve, duration incr as yield drops. for - convexity, the curve flattens out as yield drops… so duration decreases. - bn