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Mortgage security hedging and the yield curve

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  • Julia Fernald
  • Patricia C. Mosser
  • Frank Keane
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    Abstract

    The authors find that the use of Treasury securities to hedge mortgage-backed security extension risk may have magnified increases in long-term interest rates after the tightening of monetary policy in early 1994. Substantial increases in the duration of mortgage securities appear to have caused realignments of hedges and portfolios that, in turn, had a significant impact on the short-run movements of the Treasury market, particularly for ten-year securities. This phenomenon may have altered the short-run dynamics of the yield curve and thus changed the transmission of monetary policy.

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    File URL: http://www.newyorkfed.org/research/quarterly_review/1994v19/v19n2article5.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of New York in its journal Quarterly Review.

    Volume (Year): (1994)
    Issue (Month): Sum ()
    Pages: 92-100

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    Handle: RePEc:fip:fednqr:y:1994:i:sum:p:92-100:n:v.19no.2

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    Related research

    Keywords: Hedging (Finance) ; Mortgages ; Interest rates;

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    Cited by:
    1. John E. Kambhu, 1998. "Dealers' hedging of interest rate options in the U.S. dollar fixed-income market," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 35-58.
    2. Yener Altunbas & Leonardo Gambacorta & David Marques, 2008. "Securitization and the bank lending channel," Proceedings 1101, Federal Reserve Bank of Chicago.
    3. John Kambhu, 1997. "Interest rate options dealers' hedging in the US dollar fixed income market," Research Paper 9719, Federal Reserve Bank of New York.
    4. Zivney, Terry L. & Luft, Carl F., 1999. "Hedging individual mortgage risk," Financial Services Review, Elsevier, vol. 8(2), pages 101-115.
    5. Graveline, Jeremy J. & McBrady, Matthew R., 2011. "Who makes on-the-run Treasuries special?," Journal of Financial Intermediation, Elsevier, vol. 20(4), pages 620-632, October.
    6. den Haan, Wouter J. & Sumner, Steven W. & Yamashiro, Guy M., 2007. "Bank loan portfolios and the monetary transmission mechanism," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 904-924, April.

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