Changing Direction Slightly
Photo Credit: mark m || Every now and then, a change in tactics is justified
In 1994, there did come a limit where valuations of long debt undershot and started to come back. After more thought, the short-term yield effect of convexity hedging probably peaks out around 2.5-3.0% on 30-year mortgages. Unless the Fed becomes an aggressive seller of the their long bonds, and now-long MBS, I don’t see long rates going past their recent highs.
As such, I am likely to begin buying a little bit of long Treasuries as a hedge against market weakness induced by the likely Fed overshoot. Recently the short-term correlation between stocks and 30-year Treasuries has seemed to go back to stocks down, bonds up, and vice-versa.
That’s all for now.
Source: https://alephblog.com/2022/05/25/changing-direction-slightly/
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