I don’t get it. Please explain. Schweser states: Spread risk is the risk of the mortgage securitys yield spread over the corresponding T-Bond widening, and thus lowering the value of the mortgage security relative to the T-Bond. Then it states: * If the spread increases, increase the exposure to mortgage securities. * If the spread decreases, decrease the exposure to the mortgage securities. Why do we increase exposure if they said that that is the risk we are worried about? P.S. I am all sorts of pissed off today, so a funny story would also help.
this has come up before. it depends on when you buy the mortgage security. If you already own the security, you are exposed to spread risk. however, if you’re thinking of buying but haven’t yet and then the spread widens, you would want to buy more mortgage securities because they are cheaper and the expected return is now higher.
like mean reversion? Spread analysis involves mean reversion i believe, not sure
enough of this… someone give the man a funny story…
Thanks striker that makes sense!
along those lines…and comparing a MBS to a Straight bond a MBS is “opposite” to that of a Straight bond (non callable) where; for a straight bond if the spread is increasing, we would want to reduce our exposure to that bond if the spread is decreasing, we would want to increase our exposure to the bond