US Treasury yields surge, triggering mortgage hedging pressure
by@Reuters
Summary
On October 12, 2026, a significant surge in long-term US Treasury yields has led to increased mortgage hedging, adding pressure to an already strained bond market. This rise, attributed to heightened expectations for Federal Reserve rate hikes driven by recent oil price spikes, has pushed 30-year mortgage rates to a nearly three-year high of 7.4%. As a result, many homeowners are opting to remain in their existing loans rather than refinance, altering the risk profiles of mortgage-backed securities (MBS). This scenario has prompted investors to engage in convexity hedging, which involves selling Treasury futures or entering interest rate swaps to manage risk, ultimately reinforcing selling pressure in the Treasury market.
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$NLY
Analysis
Neil Sun: Neil Sun is a portfolio manager at BlueBay Asset Management. He indicated that if yields stabilize at current levels, the primary phase of selling pressure from mortgage hedging may be subsiding. James Wang: James Wang is head of macro at US Bank. He emphasized that monetary policy expectations remain the dominant driver of the bond selloff and noted the mortgage market's reduced scale compared to pre-2008 conditions. Mike Riddle: Mike Riddle is chief executive officer at Eris Innovations, a Chicago-based developer of futures and options products. He explained how rising yields are extending mortgage durations and likely requiring additional hedging that contributes to Treasury selling pressure. US Treasury: The US Treasury issues benchmark government securities whose yields serve as key references for interest rates throughout the financial system. Surging long-term yields on these securities have directly triggered mortgage-related hedging that adds selling pressure to the broader bond market. Amrut Nashikkar: Amrut Nashikkar serves as head of derivatives strategy at Barclays. He observed that a growing portion of the MBS universe lacks refinancing incentive, which reduces sensitivity to further rate moves and limits additional hedging flows. Eris Innovations: Eris Innovations develops futures and options products focused on interest rates and swaps. Its SOFR-linked swap futures have seen heightened trading activity as investors adjust positions amid the yield-driven hedging described in the news, with the firm's CEO providing market commentary. Annaly Capital Management: Annaly Capital Management is a major mortgage real estate investment trust that publishes research on MBS performance. Its recent analysis noted significant underperformance of mortgage-backed securities relative to comparable Treasuries, consistent with increased convexity hedging. Policy Influence: Expectations for Federal Reserve rate adjustments are shaping investor positioning across rates markets and influencing hedging behavior in mortgage securities. Bond Market Dynamics: MBS underperformance relative to Treasuries signals active convexity hedging that can amplify yield increases during periods of rising rates. Mortgage Hedging Mechanics: Rising yields extend the expected duration of mortgage-backed securities, prompting investors to sell Treasury futures or enter swaps to manage convexity risk.
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