The Department of Finance and Risk Engineering welcomes Leon Tatevossian, NYU Tandon FRE Adjunct Professor, to the BQE Lecture Series. Professor Tatevossian was joined by Scott Buchta, Senior Managing Director and Head of Fixed Income Strategy at Bean Capital, LLC.
Can We Still Blame MBS Hedgers?
Part of fixed-income folklore is the idea that directional moves in the rates markets can get exaggerated by the duration-rebalancing decisions of mortgage-backed security (MBS) investors and market-makers. Under stable regimes, we could posit that this theme resides in the market’s “background noise.” In those backdrops, there’s a consensus toolkit for interpreting its effect and how it fits with other price drivers. In periods of harder-to-rationalize repricings in rates space this “convexity effect” attracts more attention: The risk attributes (such as the distribution across the coupon “stack”) of the outstanding “stock” of MBSs and the sector’s relative value are major determinants of the rebalancing strategy, and thus of the effect’s magnitude.
The advent of the Fed’s quantitative easing (QE) programs (currently taking $40 billion of agency MBSs out of private hands per month, net of principal redemptions) and the continuing sell-down of GSE's balance sheets mean that there’s a significantly reduced amount of MBS paper held by “players who hedge.” Can we still blame the MBS hedgers when we experience greater-than-expected rates volatility?
Leon Tatevossian is a fellow/adjunct instructor in the Mathematics in Finance Program at NYU-Courant Institute. From 2009-16, Leon was a director in Group Risk Management at RBC Capital Markets, LLC, covering market risk for securitized products in secondary-trading, origination, and proprietary-trading areas. He has twenty-nine years of sell-side experience in the fixed-income markets, including positions as a trader, quantitative strategist, derivatives modeler, and market-risk analyst. His product background includes US Treasury securities, US agency securities, interest-rate derivatives, MBSs, ABSs, and credit derivatives. Leon graduated from MIT (SB; mathematics); he was a graduate student in mathematics at Brown University.