Sampe1Q30-what about negative convexity?!

CFA Level III
#1

Spread narrows, thus short T bonds, long others. However, due to negative convex, should we avoid MBS, but long other credit products?

#2

Anyone?

#3

don’t be confused with spreads and interest rates movements. if the spread narrows you’ll want to be long MBS as well. people can’t refinance when spreads narrow, but they can when interest rates fall. being long risky assets when spreads narrow is where you want to be.

#4

Thanks much! That’s exactly where I was wrong!!! Thanks!!!

#5

strikershank Wrote: ------------------------------------------------------- > don’t be confused with spreads and interest rates > movements. > > if the spread narrows you’ll want to be long MBS > as well. people can’t refinance when spreads > narrow, but they can when interest rates fall. > being long risky assets when spreads narrow is > where you want to be. Pg. 112 (book3) in Schweser. If spread decreases, decrease the exposure to mortgage securities. How come it is totally different from what CFAI sample exam is saying?

#6

?! !!

#7

never tough MBS when spread are narrow, see the MBS/(subprime) MBS investors now when they bought at low spread… the text clearly stated, MBS are attractive when spreads are wide!!!