Baird Fixed Income Insights: Convexity Pulse
Aug 17, 2026 · 22 min · 7 segments
In this week's Convexity Pulse, Kirill Krylov and Steven Scheerer discuss why agency MBS can look expensive at the broad basis level while still offering compelling opportunities beneath the surface…
Kirill KrylovHost
Steven ScheererHost
Well, broadly, yes, but I'm reluctant to turn that into a bearish mortgage call because the technical backdrop remains very supportive in my opinion.
You know, Karol, the, the fixed income fund flows we track came roaring back this week.
I, I think it's, uh, pretty important that we are only in August, and the year-to-date aggregate is already approaching the total for all of last year.
And from a forward mortgage supply outlook for the rest of the year, I think that's also a favorable technical for the sector.
So I'd say the broad valuation has become less compelling, but that's not that the fundamental support has disappeared.
If the 30-year basis is almost two standard errors through our fair value, why aren't you more defensive?
Well, you know how much I hate making a sector blanketing statement that solely relies on mortgage basis.
In fact, I think there's some interesting opportunities within the coupon stack.
In 30-year conventionals, 5s are about 1.3 standard errors on a high side, 4.5 are roughly 1.1, and, uh, 2s are a little over one standard error using our Treasury OAS model.
The 15-year market is even more interesting with 4s, um, almost two standard errors on a, on a good side and, and 4.5s around 1.5.
But if I see a story where I am being compensated for related risks, I will do it all day long, or should I say, "All night, all night, all night long."
The, the model also makes 30-year 3s look attractive, but that signal is being influenced by a very special dollar roll, and that's, I think, a good example of why you can't simply sort a regression output and buy whatever appears at the top.
Well, broadly, yes, but I'm reluctant to turn that into a bearish mortgage call because the technical backdrop remains very supportive in my opinion.
You know, Karol, the, the fixed income fund flows we track came roaring back this week.
I, I think it's, uh, pretty important that we are only in August, and the year-to-date aggregate is already approaching the total for all of last year.
And from a forward mortgage supply outlook for the rest of the year, I think that's also a favorable technical for the sector.
So I'd say the broad valuation has become less compelling, but that's not that the fundamental support has disappeared.
If the 30-year basis is almost two standard errors through our fair value, why aren't you more defensive?
Well, you know how much I hate making a sector blanketing statement that solely relies on mortgage basis.
In fact, I think there's some interesting opportunities within the coupon stack.
In 30-year conventionals, 5s are about 1.3 standard errors on a high side, 4.5 are roughly 1.1, and, uh, 2s are a little over one standard error using our Treasury OAS model.
The 15-year market is even more interesting with 4s, um, almost two standard errors on a, on a good side and, and 4.5s around 1.5.
But if I see a story where I am being compensated for related risks, I will do it all day long, or should I say, "All night, all night, all night long."
The, the model also makes 30-year 3s look attractive, but that signal is being influenced by a very special dollar roll, and that's, I think, a good example of why you can't simply sort a regression output and buy whatever appears at the top.
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