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 ?
Although agency pass-throughs are negative convexity instruments, most managers believe any rise in volatility this year will be associated with politics and will be temporary.
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.
The third trend that will develop is the increased liquidity for privately labeled HMBS securities as investors seek alternative income derived products without the negative convexity that traditional MBS hold.
Mortgage negative convexity presents support to a rallying Treasury market if 10-year yields trade below 4.
They provide the positive duration and positive convexity needed to offset the negative duration and negative convexity of mortgage servicing, says Shaiman.
The early adoption election also provided Cadence an opportunity to decrease the duration of its security portfolio, reduce the negative convexity inherent in mortgage-backed securities and CMOs, improve cash flow predictability and increase our average yield on investment securities.
Convexity refers to the price/yield curve; negative convexity means that the price/yield curve flattens as interest rates decline).
The early adoption of SFAS 157 and 159 provided Cadence with an opportunity to decrease the duration of our security portfolio, reduce the negative convexity inherent in mortgage-backed securities and CMOs, improve cash flow predictability and increase our average yield on investment securities," noted Mr.
This imparts less negative convexity to most CMBS issues than residential MBS.
The Company's interest rate risk exposure is further complicated by the negative convexity (i.
In the intermediate term, agency callable debt issuance will remain very active as GSEs seek to replace callable redemptions and to offset the negative convexity and volatility exposure of their mortgage portfolios.