US mortgage bonds can trigger vicious loop for Treasury yields

US mortgage bonds: US mortgage bonds are fixed-income securities backed by pools of residential mortgages, whose cash flows change as borrowers refinance or repay loans. They are central to the reported Treasury-market feedback loop because rising rates can slow prepayments, extend the bonds’ expected maturities, and prompt investors to hedge by selling Treasury securities or futures. Feedback loop: Convexity hedging can reinforce market moves because Treasury selling raises yields, which further reduces refinancing and increases the duration risk of mortgage-bond portfolios. Current backdrop: Recent Treasury selling and elevated mortgage rates have brought mortgage-related hedging back into focus as a potential amplifier of volatility in longer-term yields. Market mechanism: Mortgage bonds have negative convexity: when yields rise, slower refinancing extends their duration and increases their sensitivity to further rate increases, encouraging additional hedging sales of Treasuries.