差一張，差很多~
機率由70%一下掉到20%!
還是想辦法拉高一下好了，要不然真的會錯過太多~
2010年1月17日 星期日
2009年7月15日 星期三
Convexity Hedging and its Impact on US Swap Spreads
Convexity Hedging and its Impact on US Swap Spreads
John Wraith, The Royal Bank of Scotland, Financial Markets
Introduction
While there is a huge diversity of factors which impact on the level and direction of swap spreads in interest rate markets, some clearly have more importance than others. Over time, the dominant influences change with other developments in underlying market, and the key to anyone exposed to changes in swap spreads must therefore be to keep abreast of the nature of major influences on spreads at any given time.
In the US over the past few years, the behaviour of negative convexity hedgers has become more and more important in this regard. The correlation between yield moves and spread levels has become ever more closely entwined, and as shall now be demonstrated, this can be put at the door of the convexity hedgers.
Before examining this relationship more closely, it is necessary to have a clear understanding of negative convexity, the products it is attached to, and the reason its existence leads to activity in the interest rate swaps market.
Convexity
In simple terms, convexity is the property of an asset that describes the dynamic that for each successive basis point fall in yield, the price rises at an increasing rate. The reason for this is that as rates fall, so the duration of a normal bond increases due to the fact that future cash flows are being discounted off a lower rate. The higher the duration of a bond, the more sensitive its price is to a move in the yield. For holders of bonds, this is a highly desirable property as profits increase exponentially as yields fall, while the rate of accumulation of losses slows down as yields rise. This protects the holder to some extent against adverse market moves while enhancing his return during market rallies.
There is, however, an increasingly large part of the US bond market comprised of debt where the convexity effect is the opposite of that described above. The reason for this is that bonds issued by US Agencies incorporate a facility whereby the issuers can repay their debt in the event that the mortgage holders, to whom the proceeds of the debt issues are lent, prepay on their mortgages. As rates fall, so homeowners are prone to repay their existing mortgage and take out a new one at the lower rates now available (US homeowners are highly proactive in this regard).
As a result, falling yields on agency debt with inbuilt pre-payment options, has the effect of reducing duration, and thus creating negative convexity, whereby for each successive fall in yields the price rises more slowly, while for each successive basis point rise in yields, losses for bondholders accelerate. The correlation on this is very strong; the Bloomberg index for mid-maturity Fannie Mae debt measured a fall in duration from 4.7 years at the end of June 2001 to 2.5 years by early September; over this period the generic 10-year Treasury yield fell from 5.42% to 4.30%.
Implications of Negative Convexity for the Swaps Market
While bonds with negative convexity properties are priced more cheaply than straight debt (reflecting the cost of the prepayment option embedded in the paper), there is still a desire on the part of holders of these bonds to avoid the undesirable impact of sizeable rate moves. To benefit from a fall in yields to the same extent as holders of positively convex bonds, there is a need to seek increased exposure to the market each time rates fall. Similarly, to avoid accelerating losses, there is a need to limit that exposure to the market when rates rise.
The mechanisms available to agency bondholders to manage their negative convexity are varied, and in the past tended to involve activity in the Treasury market. By buying US Treasuries in times of falling yields, the profits generated were enhanced by money made on this long Treasury position; by reversing this and establishing a short position in rising yield environments, the accelerating losses incurred on their agency bond holdings were reduced. While this activity is clearly not an exact science due to the uncertainty of future market direction, there will be trading levels at which large volumes of such hedging activity are triggered.
However, for such hedges to be efficient, the relationship between the underlying position and the hedge needs to be close. This implies that Treasuries only remained an effective counterweight to negative convexity as long as they could be relied upon to exhibit very similar yield changes to agencies. This relationship has deteriorated significantly over the past 3.5 years .
The initial spread dislocation came with the financial crises of Autumn 1998 (LTCM, Russia) and continued through the budgetary surplus period at the end of the decade that led to a scarcity premium being priced into Treasuries. A further shock came in early 2000 with the Baker Bill questioning the implicit government-guaranteed status of agency debt. This led to a further spike wider in the spread, but at the same time aligned mortgage bonds more closely with the swaps market by effectively moving them from being a government debt-linked instrument to a corporate debt-linked one.
While this premium has receded since President Bush's more expansive programmes were introduced, there is still an unwillingness to use Treasuries as a hedge for mortgage bonds; with the volume of agency debt in the secondary market set to outstrip the supply of Treasuries in the next ten years or so, the liquidity to use them as the hedge instrument of choice for agency bondholders is likely to decrease in the future.
As this relationship deteriorated, so agency bondholders sought an alternative hedge for their products, and in doing so have turned increasingly to the interest rate swaps market. The derivative nature of the market means that there will be none of the supply / demand issues associated with physical bonds, while the fact that there is no initial outlay of principal amounts also removes the danger of adverse repo market moves damaging the efficiency of the hedge.
Figure 2 demonstrates how swaps have behaved far more efficiently as a hedge instrument for mortgage bond portfolio managers, and why as a result the proportion of negative convexity hedging transacted through the swaps market is thought to be 70% of the total - the sharp fall in rates that saw the 10-year swap rate fall from 6.20% to 5.50% between mid-December 2001 and mid-January 2002, was estimated to have resulted in $60bn of convexity hedging flow through the swaps market.
Conclusion
Having explored the reasons behind the switch in the hedge instrument of choice for agency debt investors, we can now examine the impact such major flows have on swap spreads. The answer to this is clear: the relationship between swap spreads and directional moves in rates has become highly correlated over the past three years. As falling rates cause convexity hedgers to receive fixed in the swaps market to a far greater degree than they buy Treasuries as an alternative, so spreads narrow in response. Conversely, in a rising rate environment, spreads are pushed wider as mortgage bond investors seek to limit the impact of their exposure to negative convexity by paying fixed via the swaps market.
With the supply of agency debt set to continue increasing at a rapid rate for the foreseeable future and the proportion of convexity hedging carried out in the swaps market - as opposed to the Treasury market - likely to also continue growing, this relationship should become even more highly correlated. There are many other forces at work influencing swap spreads and each has a varying impact on the overall level, but the sheer size of the flows stemming from convexity hedging look set to keep this as the major determinant of swap spreads for a long time to come.
John Wraith, The Royal Bank of Scotland, Financial Markets
Introduction
While there is a huge diversity of factors which impact on the level and direction of swap spreads in interest rate markets, some clearly have more importance than others. Over time, the dominant influences change with other developments in underlying market, and the key to anyone exposed to changes in swap spreads must therefore be to keep abreast of the nature of major influences on spreads at any given time.
In the US over the past few years, the behaviour of negative convexity hedgers has become more and more important in this regard. The correlation between yield moves and spread levels has become ever more closely entwined, and as shall now be demonstrated, this can be put at the door of the convexity hedgers.
Before examining this relationship more closely, it is necessary to have a clear understanding of negative convexity, the products it is attached to, and the reason its existence leads to activity in the interest rate swaps market.
Convexity
In simple terms, convexity is the property of an asset that describes the dynamic that for each successive basis point fall in yield, the price rises at an increasing rate. The reason for this is that as rates fall, so the duration of a normal bond increases due to the fact that future cash flows are being discounted off a lower rate. The higher the duration of a bond, the more sensitive its price is to a move in the yield. For holders of bonds, this is a highly desirable property as profits increase exponentially as yields fall, while the rate of accumulation of losses slows down as yields rise. This protects the holder to some extent against adverse market moves while enhancing his return during market rallies.
There is, however, an increasingly large part of the US bond market comprised of debt where the convexity effect is the opposite of that described above. The reason for this is that bonds issued by US Agencies incorporate a facility whereby the issuers can repay their debt in the event that the mortgage holders, to whom the proceeds of the debt issues are lent, prepay on their mortgages. As rates fall, so homeowners are prone to repay their existing mortgage and take out a new one at the lower rates now available (US homeowners are highly proactive in this regard).
As a result, falling yields on agency debt with inbuilt pre-payment options, has the effect of reducing duration, and thus creating negative convexity, whereby for each successive fall in yields the price rises more slowly, while for each successive basis point rise in yields, losses for bondholders accelerate. The correlation on this is very strong; the Bloomberg index for mid-maturity Fannie Mae debt measured a fall in duration from 4.7 years at the end of June 2001 to 2.5 years by early September; over this period the generic 10-year Treasury yield fell from 5.42% to 4.30%.
Implications of Negative Convexity for the Swaps Market
While bonds with negative convexity properties are priced more cheaply than straight debt (reflecting the cost of the prepayment option embedded in the paper), there is still a desire on the part of holders of these bonds to avoid the undesirable impact of sizeable rate moves. To benefit from a fall in yields to the same extent as holders of positively convex bonds, there is a need to seek increased exposure to the market each time rates fall. Similarly, to avoid accelerating losses, there is a need to limit that exposure to the market when rates rise.
The mechanisms available to agency bondholders to manage their negative convexity are varied, and in the past tended to involve activity in the Treasury market. By buying US Treasuries in times of falling yields, the profits generated were enhanced by money made on this long Treasury position; by reversing this and establishing a short position in rising yield environments, the accelerating losses incurred on their agency bond holdings were reduced. While this activity is clearly not an exact science due to the uncertainty of future market direction, there will be trading levels at which large volumes of such hedging activity are triggered.
However, for such hedges to be efficient, the relationship between the underlying position and the hedge needs to be close. This implies that Treasuries only remained an effective counterweight to negative convexity as long as they could be relied upon to exhibit very similar yield changes to agencies. This relationship has deteriorated significantly over the past 3.5 years .
The initial spread dislocation came with the financial crises of Autumn 1998 (LTCM, Russia) and continued through the budgetary surplus period at the end of the decade that led to a scarcity premium being priced into Treasuries. A further shock came in early 2000 with the Baker Bill questioning the implicit government-guaranteed status of agency debt. This led to a further spike wider in the spread, but at the same time aligned mortgage bonds more closely with the swaps market by effectively moving them from being a government debt-linked instrument to a corporate debt-linked one.
While this premium has receded since President Bush's more expansive programmes were introduced, there is still an unwillingness to use Treasuries as a hedge for mortgage bonds; with the volume of agency debt in the secondary market set to outstrip the supply of Treasuries in the next ten years or so, the liquidity to use them as the hedge instrument of choice for agency bondholders is likely to decrease in the future.
As this relationship deteriorated, so agency bondholders sought an alternative hedge for their products, and in doing so have turned increasingly to the interest rate swaps market. The derivative nature of the market means that there will be none of the supply / demand issues associated with physical bonds, while the fact that there is no initial outlay of principal amounts also removes the danger of adverse repo market moves damaging the efficiency of the hedge.
Figure 2 demonstrates how swaps have behaved far more efficiently as a hedge instrument for mortgage bond portfolio managers, and why as a result the proportion of negative convexity hedging transacted through the swaps market is thought to be 70% of the total - the sharp fall in rates that saw the 10-year swap rate fall from 6.20% to 5.50% between mid-December 2001 and mid-January 2002, was estimated to have resulted in $60bn of convexity hedging flow through the swaps market.
Conclusion
Having explored the reasons behind the switch in the hedge instrument of choice for agency debt investors, we can now examine the impact such major flows have on swap spreads. The answer to this is clear: the relationship between swap spreads and directional moves in rates has become highly correlated over the past three years. As falling rates cause convexity hedgers to receive fixed in the swaps market to a far greater degree than they buy Treasuries as an alternative, so spreads narrow in response. Conversely, in a rising rate environment, spreads are pushed wider as mortgage bond investors seek to limit the impact of their exposure to negative convexity by paying fixed via the swaps market.
With the supply of agency debt set to continue increasing at a rapid rate for the foreseeable future and the proportion of convexity hedging carried out in the swaps market - as opposed to the Treasury market - likely to also continue growing, this relationship should become even more highly correlated. There are many other forces at work influencing swap spreads and each has a varying impact on the overall level, but the sheer size of the flows stemming from convexity hedging look set to keep this as the major determinant of swap spreads for a long time to come.
2008年11月26日 星期三
2008年10月10日 星期五
Denmark Offers a Model Mortgage Market There is a safe way to securitize home loans. By GEORGE SOROS from WSJ.com
The American system of mortgage financing is broken and needs a total overhaul. Until there is a realistic prospect of stabilizing housing prices, the value of mortgage-related securities will erode and Treasury Secretary Henry Paulson's efforts will come to naught.
There are four fundamental problems with our current system of mortgage financing.
First, the business model of Government Sponsored Entities (GSEs) in which profits accrue to the private sector but risks are underwritten by the public has proven unworkable. It would be a grave mistake to preserve the GSEs in anything resembling their current form.
Second, the American style of mortgage securitization is rife with conflicts where entities that originate, securitize and service mortgages are generally not the same as those that invest in mortgage securities. As a result, the incentives to originate sound mortgages and to service them well are inadequate. No wonder that the quality of mortgages degenerated so rapidly.
Third, mortgage-backed securitizations, which were meant to reduce risk by creating geographically diversified pools of mortgages, actually increased risk by creating complex capital structures that impede the modification of mortgages in the case of default.
Finally, and most fundamentally, the American mortgages market is asymmetric. When interest rates fall and house prices rise, mortgages can be refinanced at par value, generating the mortgage equity withdrawals that fueled the housing bubble. However, when interest rates rise and house prices fall, mortgages can only be refinanced at par value even though the market price of the securitized mortgage has fallen.
To reconstruct our mortgage system on a sounder basis, we ought to look to the Danish model, which has withstood many tests since it was brought into existence after the great fire of Copenhagen in 1795. It remains the best performing in Europe during the current crisis. First, it is an open system in which all mortgage originators can participate on equal terms as long as they meet the rigorous regulatory requirements. There are no GSEs enjoying a quasimonopolistic position.
Second, mortgage originators are required to retain credit risk and to perform the servicing functions, thereby properly aligning the incentives. Third, the mortgage is funded by the issuance of standardized bonds, creating a large and liquid market. Indeed, the spread on Danish mortgage bonds is similar to the option-adjusted spread on bonds issued by the GSEs, although they carry no implicit government guarantees.
Finally, the asymmetric nature of American mortgages is replaced by what the Danes call the Principle of Balance. Every mortgage is instantly converted into a security of the same amount and the two remain interchangeable at all times. Homeowners can retire mortgages not only by paying them off, but also by buying an equivalent face amount of bonds at market price. Because the value of homes and the associated mortgage bonds tend to move in the same direction, homeowners should not end up with negative equity in their homes. To state it more clearly, as home prices decline, the amount that a homeowner must spend to retire his mortgage decreases because he can buy the bonds at lower prices.
The U.S. can emulate the Danish system with surprisingly few modifications from our current practices. What is required is transparent, standardized securities which create large and fungible pools. Today in the U.S., over half of all mortgages are securitized by Ginnie Mae, which issues standardized securities. All that is missing is allowing the borrowers to redeem their mortgages at the lower of par or market.
Because of the current havoc in the mortgage market, there is no confidence in the origination and securitization process. As a result, a government guarantee is indispensable at this time, and may be needed for the next few years. As the private sector regains its strength, the government guarantees could, and should, be gradually phased out.
How to get there from here? It will involve modifying the existing stock of mortgages, so that the principal does not exceed the current market value of the houses, and refinancing them with Danish-style loans. The modification will have to be done by servicing companies that need to be properly incentivized. Modifying mortgages that have been sliced and diced into securitizations may require legislative authorization. The virtual monopoly of the GSEs would be terminated and they would be liquidated over time.
A plan to reorganize the mortgage industry along these lines would inspire the confidence that would allow a successful recapitalization of the banking system with the help of the $700 billion package approved last week.
Mr. Soros is chairman of Soros Fund Management and the author of "The New Paradigm for Financial Markets" (Public Affairs, 2008).
There are four fundamental problems with our current system of mortgage financing.
First, the business model of Government Sponsored Entities (GSEs) in which profits accrue to the private sector but risks are underwritten by the public has proven unworkable. It would be a grave mistake to preserve the GSEs in anything resembling their current form.
Second, the American style of mortgage securitization is rife with conflicts where entities that originate, securitize and service mortgages are generally not the same as those that invest in mortgage securities. As a result, the incentives to originate sound mortgages and to service them well are inadequate. No wonder that the quality of mortgages degenerated so rapidly.
Third, mortgage-backed securitizations, which were meant to reduce risk by creating geographically diversified pools of mortgages, actually increased risk by creating complex capital structures that impede the modification of mortgages in the case of default.
Finally, and most fundamentally, the American mortgages market is asymmetric. When interest rates fall and house prices rise, mortgages can be refinanced at par value, generating the mortgage equity withdrawals that fueled the housing bubble. However, when interest rates rise and house prices fall, mortgages can only be refinanced at par value even though the market price of the securitized mortgage has fallen.
To reconstruct our mortgage system on a sounder basis, we ought to look to the Danish model, which has withstood many tests since it was brought into existence after the great fire of Copenhagen in 1795. It remains the best performing in Europe during the current crisis. First, it is an open system in which all mortgage originators can participate on equal terms as long as they meet the rigorous regulatory requirements. There are no GSEs enjoying a quasimonopolistic position.
Second, mortgage originators are required to retain credit risk and to perform the servicing functions, thereby properly aligning the incentives. Third, the mortgage is funded by the issuance of standardized bonds, creating a large and liquid market. Indeed, the spread on Danish mortgage bonds is similar to the option-adjusted spread on bonds issued by the GSEs, although they carry no implicit government guarantees.
Finally, the asymmetric nature of American mortgages is replaced by what the Danes call the Principle of Balance. Every mortgage is instantly converted into a security of the same amount and the two remain interchangeable at all times. Homeowners can retire mortgages not only by paying them off, but also by buying an equivalent face amount of bonds at market price. Because the value of homes and the associated mortgage bonds tend to move in the same direction, homeowners should not end up with negative equity in their homes. To state it more clearly, as home prices decline, the amount that a homeowner must spend to retire his mortgage decreases because he can buy the bonds at lower prices.
The U.S. can emulate the Danish system with surprisingly few modifications from our current practices. What is required is transparent, standardized securities which create large and fungible pools. Today in the U.S., over half of all mortgages are securitized by Ginnie Mae, which issues standardized securities. All that is missing is allowing the borrowers to redeem their mortgages at the lower of par or market.
Because of the current havoc in the mortgage market, there is no confidence in the origination and securitization process. As a result, a government guarantee is indispensable at this time, and may be needed for the next few years. As the private sector regains its strength, the government guarantees could, and should, be gradually phased out.
How to get there from here? It will involve modifying the existing stock of mortgages, so that the principal does not exceed the current market value of the houses, and refinancing them with Danish-style loans. The modification will have to be done by servicing companies that need to be properly incentivized. Modifying mortgages that have been sliced and diced into securitizations may require legislative authorization. The virtual monopoly of the GSEs would be terminated and they would be liquidated over time.
A plan to reorganize the mortgage industry along these lines would inspire the confidence that would allow a successful recapitalization of the banking system with the help of the $700 billion package approved last week.
Mr. Soros is chairman of Soros Fund Management and the author of "The New Paradigm for Financial Markets" (Public Affairs, 2008).
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