Negative convexity

Negative convexity

A bond characteristic such that the price appreciation will be less than the price depreciation for a large change in yield of a given number of basis points. For example, a fixed-rate mortgage may lose value as rates go down because of prepayments.

Negative Convexity

In callable bonds, a situation in which the principal is returned, either before maturity when interest rates are declining or after maturity when interest rates are rising. This exposes bondholders to the risk of realizing a lower return.
References in periodicals archive ?
Callable bonds contain negative convexity which may be defined as a characteristic of a bond, when the price appreciation is less than the price depreciation, for a large change in interest rates.
It has a similar maturity risk to the underlying mortgage but, because of its negative convexity, has a much greater volatility of return as expected maturity ebbs and flows.
Indeed, to compensate negative convexity effects, buying options (in other words, buying positive convexity) on the asset side is a decision that deserves careful consideration.
They provide the positive duration and positive convexity needed to offset the negative duration and negative convexity of mortgage servicing, says Shaiman.
This imparts less negative convexity to most CMBS issues than residential MBS.
Negative convexity refers to the phenomenon that for a given change in overall market interest rates, prices of mortgage-backed securities or servicing rights decline faster than the change in market yields.
Mitigation of negative duration and (often) negative convexity
Because interest rates had been on a steady uptrend for years, pipeline fallout and negative convexity were merely academic concepts.