Do we always assume that MBS/Callables are bad in a decreasing rate environment and good in an increasing?
In the negative convexity region, MBS/Callables will have increased duration in rising rates, causing value to fall faster than a treasury until it reaches the positive convexity region, correct?
Because the little chart is DURATION
Rising Rates Falling Rates
Negative Convexity, Increases Decreased
Positive Convexity Decreased Increase
Not even a “yep” or “nope”?
the increasing or decreasing of duration of MBS/Callable bonds is not what causes the value to fall faster/slower than treasuries, but rather the current duration level.
in the negative convexity region MBS/Callables actually have lower duration than treasuries, however their convexity is higher which means the change in duration is greater for MBS/Callables is higher than the change in duration for treasuries.
When interest rates decline - callables underperform bullets. [Due to the upper boundary imposed by the Call Price] (Bull Bond Market).
When Interst rates rise (Bear Bond Market) - Probability of early call diminishes and Calls outperform Bullets.
Puts also outperform in a Bearish outlook market (when rates rise).
Ok so I wont overcomplicate it.