The Negative Complexity of Mortgages

Before the Fed embarked on their quantitative easing, bond buying program, it was normal for mortgage participants in the United States to hedge that negative convexity. So essentially if interest rates go down, a mortgage security goes up in price. But by lesser an extent, when the mortgage equity goes down in price when rates go up. We've just had one of the fastest tightening cycles in history. Their mortgage duration extended because homeowners prepaid less than what they had modeled.