Thats a really good explanation doseweissen. Thanks alot. That helped. I was all throughtout confused who this could happen… I was thinking that we’r talking about a callable bond which is in it’s that section of the curve where it shows negative convexity (did I say that right or the other way round)
MBS is a callable security…prepayment (full or partial) is a form of an call option…
MBS exhibit negative convexity on both ends through prepayment risk ei. falling rates and extension risk ei. rising rates.