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Mortgage security hedging and the yield curve

Author

Listed:
  • Julia Fernald
  • Patricia C. Mosser
  • Frank Keane

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.

Suggested Citation

  • Julia Fernald & Patricia C. Mosser & Frank Keane, 1994. "Mortgage security hedging and the yield curve," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 92-100.
  • Handle: RePEc:fip:fednqr:y:1994:i:sum:p:92-100:n:v.19no.2
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    File URL: http://www.newyorkfed.org/research/quarterly_review/1994v19/v19n2article5.pdf
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    Citations

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    Cited by:

    1. Zivney, Terry L. & Luft, Carl F., 1999. "Hedging individual mortgage risk," Financial Services Review, Elsevier, vol. 8(2), pages 101-115.
    2. John 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.
    3. repec:bis:bisqtr:0206g is not listed on IDEAS
    4. 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.
    5. 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.
    6. John Kambhu, 1997. "Interest rate options dealers' hedging in the US dollar fixed income market," Research Paper 9719, Federal Reserve Bank of New York.
    7. Altunbas, Yener & Gambacorta, Leonardo & Marques-Ibanez, David, 2009. "Securitisation and the bank lending channel," European Economic Review, Elsevier, vol. 53(8), pages 996-1009, November.
    8. Hanson, Samuel G., 2014. "Mortgage convexity," Journal of Financial Economics, Elsevier, vol. 113(2), pages 270-299.

    More about this item

    Keywords

    Hedging (Finance) ; Mortgages ; Interest rates;

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