Strategy #0000000050 · Mortgage securities and prepayment risk
Duration-hedged MBS carry
Approximate MBS duration matching with a pay-fixed swap, then examine carry and rate shocks separately.
An investor can buy an MBS passthrough and use a pay-fixed swap or futures to reduce first-order rate duration. Borrower prepayment options shorten duration as rates fall and extend it as rates rise, creating negative convexity and dynamic-hedging needs. Spread carry does not guarantee total return; funding, servicing, prepayments, OAS, basis and convexity-hedge costs matter.
Prepayments make MBS duration and convexity rate-dependent; a static rate hedge cannot remove option risk.
Three ways in
Understand the story. Then inspect the risk.
Start with a familiar situation, check the payoff, then test how the numbers change.
The idea · in two minutes
How does MBS spread income change after funding, swap carry, residual duration and negative convexity?
Jack holds an MBS with duration 5.5. Rose sizes a pay-fixed swap hedge and enters swap duration and notional ratio to estimate residual duration.
She adds MBS spread, funding cost, swap carry, holding period, rate shock and a negative-convexity assumption to separate carry from price sensitivity.
If rising rates slow refinancing, MBS duration can extend and the original swap hedge may be too small. Falling rates can accelerate prepayments and cap gains, so test curve and prepayment scenarios.
- MBS spread carry assumptionEnter MBS/swap duration and notional, spreads, funding, holding days, rate shock and convexity assumption.
- Residual duration after swap hedgeLinear duration plus convexity approximation; no loan-level cash flows, prepayments, OAS calibration, repo haircuts or dynamic rebalancing.
- Carry plus rate/convexity scenario less costsIllustrative expiry outcome.
Illustrative research examples only. They are not live signals or a recommendation.
The mechanics · payoff and exposure
D_{res}=D_{MBS}-qD_{swap},\quad R\approx (OAS-funding+swapCarry)\frac{d}{36500}-D_{res}\frac{\Delta y_{bp}}{100}+\frac12 C_{MBS}(\Delta y)^2-C
Dres is MBS duration less notional-adjusted swap duration; C_MBS is approximate effective convexity and Δy is decimal yield change. Carry and rate sensitivity are simplified percent-of-notional values.
Greeks: the directional intuition
- 提前還款
- Measures sensitivity to implied volatility.
- 延展與負凸性
- Measures sensitivity to implied volatility.
- OAS 與資金
- Measures sensitivity to implied volatility.
D_{res}=D_{MBS}-qD_{swap},\quad R\approx (OAS-funding+swapCarry)\frac{d}{36500}-D_{res}\frac{\Delta y_{bp}}{100}+\frac12 C_{MBS}(\Delta y)^2-C
Practical context · published observations
Duration-hedged MBS carry: read the record with its caveats.
The chart uses the published figures or explicitly labelled study inputs below. A historical index or model replay is not the same as an investor’s realised account return.
線性 duration 加凸性近似；沒有貸款層級現金流、提前還款、OAS 校準、repo haircuts 或動態再平衡。 Source ↗ · Methodology ↗
Change assumptions and inspect the scenario
Inputs illustrate the strategy mechanics; they are not live quotes, forecasts or investment advice.
Variants · same family, different risk levers
Related methods change the mechanism or risk.
Compare their signal, hedge and model assumptions.
| Related strategy | Relationship | What changes | New cost or risk |
|---|---|---|---|
| MBS OAS carry | Spread risk premium | Sizes exposure from model OAS versus funding. | OAS depends on model and prepayment assumptions. |
| Specified pool versus TBA | Pay-up spread | Compares a specified mortgage pool with deliverable TBA premium. | Pool characteristics and delivery-option risk. |
| TBA dollar roll | Funding and roll | Trades implied financing across TBA months. | Delivery, supply-demand and roll specialness. |
Linear duration plus convexity approximation; no loan-level cash flows, prepayments, OAS calibration, repo haircuts or dynamic rebalancing.
Read beyond the summary
References
Primary sources and research used to describe the strategy and its limits.