Treasury Selloff Deepens as Mortgage Investors Dump Government Debt

AOL.com reported Tuesday that the ongoing Treasury selloff is being intensified by a technical dynamic in the mortgage market, compounding pressure on US government debt beyond what inflation data alone can explain.

Yields Hit Multi-Month Highs

The benchmark 10-year Treasury yield climbed 23 basis points across a single week, touching 4.69% on Tuesday. That marked the highest level since January 2025. The five-year yield simultaneously reached a 15-month peak of 4.35%. Both maturities are focal points for a hedging practice known as convexity hedging, which has grown significantly more active as rates have moved sharply higher. The 10-year yield has now risen more than 60 basis points since the start of the US-Israeli conflict with Iran. Hotter-than-expected April inflation prints have also pushed investors to price in Federal Reserve rate hikes rather than the cuts many had anticipated earlier this year.

What Is Convexity Hedging

Mortgage-backed securities are pools of home loans that pay investors through monthly principal and interest streams. When interest rates rise, homeowners refinance less. That slows prepayments and effectively lengthens the duration of MBS portfolios, making them more sensitive to further rate moves. To offset that risk, institutional holders such as insurance companies and real estate investment trusts sell Treasury futures. Vishal Khanduja, head of broad markets fixed income at Morgan Stanley Investment Management, told AOL.com the speed of the yield move had triggered forced selling. CME Group data showed unusually large block trades in five- and 10-year note futures on Tuesday. One transaction alone involved 33,000 contracts on five-year notes, far exceeding the typical range of 5,000 to 8,000 contracts.

Fed’s Retreat From MBS Amplifies the Effect

A second force reinforcing this dynamic is the Federal Reserve’s ongoing quantitative tightening program. The Fed currently allows $35 billion in MBS to roll off its balance sheet each month. Harley Bassman, managing partner at Simplify Asset Management, explained that this process effectively transfers negative convexity from the Fed’s holdings back into the private market. Analysts noted that once QT ends, those amplifying flows will dissipate. The scale of convexity hedging remains smaller than in the pre-2008 period, when Fannie Mae and Freddie Mac actively managed enormous duration gaps. Both enterprises have significantly reduced their mortgage holdings since the financial crisis.

Background: A Market Under Multiple Pressures

The current episode sits within a broader backdrop of fiscal anxiety. Rising US debt issuance, sticky inflation, and geopolitical uncertainty have all contributed to a higher real rate environment. Convexity hedging adds a mechanical, self-reinforcing layer on top of those fundamentals, helping explain why the bond selloff has outpaced what macro data alone would suggest.

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