MBS - Spread

Book states: If Spread Increases, Increase your exposure to MBS If Spread Decreases, Decrease your exposure to MBS Could someone explain this to me one more time? :slight_smile: Is it becasue a MBS has negative convexity and whenever there is an interest rate increase, it will outperform non-callable bonds and vice-versa?

If spread Increases they are cheap - Buy If spread decreases they are expensive - Sell

again this is perspective of do you own or are you GOING to own. this post deals with goign to own.

Well here’s the thing… if the spread is already high and then you buy because you think the spread will narrow, then they are cheap. But if spreads are currently narrow and you expect them to inrease/widen, why would they be cheap?

again. if you already own (which you should have already sold a portion because the spread narrowed) and you expect the spread to widen you will not want to own MBS. If you’re going to buy them and you expect the spread to widen you will buy them after the spread widens. and then when the spread narrows, sell them.

okay cool… I hope CFAI will be clear when they ask a question about this.

PJStyles Wrote: ------------------------------------------------------- > okay cool… I hope CFAI will be clear when they > ask a question about this. HA, When have they ever been clear on anything