Market directional and mortgage security

Hi all, What does ‘market directional’ mean and why mortgage security are called market directional? Thanks

Market direction means that the change in value is not the same when interest rate changes --> securities are only favorable in certain market direction. For MBS - Interest rate down, price goes up is much slower than normal bond (because of the call option) --> not desirable as normal bonds. - Interest rate up, price goes down not as quickly --> desirable when interest up.

bump.

A regular non-callable bond value goes up when interest rates go down. In contrast, a poorly hedged MBS position will rise with rising interest rates and fall with falling interest rates- this unintentional price behavior is labeled “Market Directional” A two-bond hedge when properly constructed will avoid this.

thanks for the clarification, jbaphna. MBS is still market-directional if just using duration hedge (shorting treasury futures). - P180 2-bond hedge removes the market-directionality.

elcfa Wrote: ------------------------------------------------------- > For MBS > - Interest rate up, price goes down not as quickly > --> desirable when interest up. Does this occurs only in the range of I/R < MBS’s C/R ? When I/R > MBS’s C/R, do both normal bond & MBS behaves similarly (depends on their durations) ?

Anyone can reply to my previous message ?

AMA, you are right, if I/R > MBS’s C/R then you are out of the -ve convexity curve area. The MBS will exhibit positive convexity like a regular bond when rates are high.

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