Baird Fixed Income Insights: Convexity Pulse
Jun 8, 2026 · 20 min · 6 segments
In this week’s Convexity Pulse, Kirill Krylov and Steven Scheerer discuss why volatility, rather than the outright direction of rates, may remain the most important variable for agency MBS investors…
Kirill KrylovHost
Steven ScheererHost
Last week started with a question about geopolitics and ended with a question about employment.
Middle East continued to dominate headline, but the market attention quickly shifting back to the U.S. labor market after a rather surprisingly resilient employment report.
from last week? Well, for me, the biggest takeaway is that the labor market continues to deny the Fed a reason to ease.
The question now is how long the Fed can remain on hold and whether inflation expectations eventually force a more hawkish conversation.
You know, as old timers might remember, Powell once described certain policy discussions as thinking about thinking about something.
Well, and that is what makes the next week's CPI report so important, right, Stephen? The market has already absorbed the stronger labor report.
It's also trying to process higher energy prices and the possibility that the Middle East evolves into a more persistent inflation shock, which I think it will.
So CPI becomes the first real test of whether the higher for longer narrative remains constrained or starts morphing into something much more hawkish.
If inflation behaves, investors can probably live with the current environment.
The combination of stronger labor, higher oil prices, and sticky inflation becomes much more difficult for fixed-income investors to ignore.
That's when the market starts talking less about cuts and more about whether policy is restrictive enough.
Why are we talking about this? Because this is a podcast for mortgage investors.
And for mortgage investors, though, the issue isn't necessarily whether rates move up or down.
Mortgages generally perform best when investors have confidence that rates are not about to move dramatically in either direction.
Last week started with a question about geopolitics and ended with a question about employment.
Middle East continued to dominate headline, but the market attention quickly shifting back to the U.S. labor market after a rather surprisingly resilient employment report.
from last week? Well, for me, the biggest takeaway is that the labor market continues to deny the Fed a reason to ease.
The question now is how long the Fed can remain on hold and whether inflation expectations eventually force a more hawkish conversation.
You know, as old timers might remember, Powell once described certain policy discussions as thinking about thinking about something.
Well, and that is what makes the next week's CPI report so important, right, Stephen? The market has already absorbed the stronger labor report.
It's also trying to process higher energy prices and the possibility that the Middle East evolves into a more persistent inflation shock, which I think it will.
So CPI becomes the first real test of whether the higher for longer narrative remains constrained or starts morphing into something much more hawkish.
If inflation behaves, investors can probably live with the current environment.
The combination of stronger labor, higher oil prices, and sticky inflation becomes much more difficult for fixed-income investors to ignore.
That's when the market starts talking less about cuts and more about whether policy is restrictive enough.
Why are we talking about this? Because this is a podcast for mortgage investors.
And for mortgage investors, though, the issue isn't necessarily whether rates move up or down.
Mortgages generally perform best when investors have confidence that rates are not about to move dramatically in either direction.
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