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.