From bond market blog Across the Curve:
As far as the agency passthrough market is concerned, we are at the point of maximum negative convexity at the moment (Figure 2). We estimate that 30-year agency passthrough universe will extend by $149 billion 10-year Treasury equivalents for a 25bps backup (parallel shift) in rates. Note that the change in duration of the 30-year passthrough universe for a 25 bps change in interest rates is a lot higher than that of corresponding MSRs, but only a small portion of negative convexity risk in agency passthroughs is actively hedged (only about 10%-15% of the risk) while almost all the negative convexity risk in MSRs is hedged fairly actively.
Translation: If MBS rates rise another 25bps investors will need to hedge their portfolios by selling a whopping $149bn of 10-year Treasuries.
Related links:
Convexed – FT Alphaville
The Fed’s asset-liability mismatch – FT Alphaville
Is the Fed losing control? – FT Alphaville
Mortgage convexity risk - Investing in bonds