Baird Fixed Income Insights: Convexity Pulse
Jun 15, 2026 · 19 min · 6 segments
*Every generation believes it is navigating unprecedented uncertainty. This week, Kirill Krylov and Steven Scheerer explore what that uncertainty means for mortgage investors today. The discussion…
Kirill KrylovHost
Steven ScheererHost
[upbeat music] Kiril, last week we ended the discussion on a fairly optimistic note, you know, regarding the bond fund flows.
The numbers from the Memorial Day shortened week were a bit disappointing, but you had suggested that the weakness looked temporary and that we'd likely have a more encouraging update this week.
Well, as much as I love to point out when your predictions go wrong, this time I just can't do it.
In this week's report, not only did flows rebound, the data delivered very strong.
Combined taxable bond funds and ETF inflows reached nearly 30 billion, making it the second strongest weekly reading we've seen in the last two years.
Passive flows remained very healthy at roughly 13 billion, but active inflows surged about 14 billion week over week and finished near 16 billion for the week.
And I think that's important because it's active managers making a decision on what to buy as opposed to just money mechanically finding its way into fixed income.
Well, Steven, thank you so much for highlighting the only time blind squirrel was actually right.
But I promise you, just to preserve your ego, I will give you plenty of opportunities to prove the opposite.
We, we have spent a lot of time discussing supply constraints in the mortgage market, but demand, well, obviously still matters.
When you see active managers suddenly putting that amount of money to work, well, it's hard to ignore.
Do you think those inflows help explain why mortgages snap back into their out-performance mode last week?
The first week of June wasn't particularly friendly for mortgages, but last week looked much more familiar.
Mortgages outperformed, current coupon spreads tightened, and investors continued absorbing available supply without much difficulty.
When you combine strong inflows with a market that remains increasingly convinced that a refinance wave is not imminent, the technical backdrop becomes quite conservative.
Market keeps waiting for some catalyst that will unlock refinancing activity, but every month that catalyst seem to move further and further into the future.
As a result, investors aren't worrying about prepayments nearly as much as they were, let's say, a year ago.
Instead, they are looking at the market where supply remains limited and collateral remain relatively scarce.
Yes, and with that backdrop, it's understandable why current coupon spreads tightened another four basis points last week.
According to our fair value framework, we're now approaching the tighter end of the projected range, although we are still inside of it.
[upbeat music] Kiril, last week we ended the discussion on a fairly optimistic note, you know, regarding the bond fund flows.
The numbers from the Memorial Day shortened week were a bit disappointing, but you had suggested that the weakness looked temporary and that we'd likely have a more encouraging update this week.
Well, as much as I love to point out when your predictions go wrong, this time I just can't do it.
In this week's report, not only did flows rebound, the data delivered very strong.
Combined taxable bond funds and ETF inflows reached nearly 30 billion, making it the second strongest weekly reading we've seen in the last two years.
Passive flows remained very healthy at roughly 13 billion, but active inflows surged about 14 billion week over week and finished near 16 billion for the week.
And I think that's important because it's active managers making a decision on what to buy as opposed to just money mechanically finding its way into fixed income.
Well, Steven, thank you so much for highlighting the only time blind squirrel was actually right.
But I promise you, just to preserve your ego, I will give you plenty of opportunities to prove the opposite.
We, we have spent a lot of time discussing supply constraints in the mortgage market, but demand, well, obviously still matters.
When you see active managers suddenly putting that amount of money to work, well, it's hard to ignore.
Do you think those inflows help explain why mortgages snap back into their out-performance mode last week?
The first week of June wasn't particularly friendly for mortgages, but last week looked much more familiar.
Mortgages outperformed, current coupon spreads tightened, and investors continued absorbing available supply without much difficulty.
When you combine strong inflows with a market that remains increasingly convinced that a refinance wave is not imminent, the technical backdrop becomes quite conservative.
Market keeps waiting for some catalyst that will unlock refinancing activity, but every month that catalyst seem to move further and further into the future.
As a result, investors aren't worrying about prepayments nearly as much as they were, let's say, a year ago.
Instead, they are looking at the market where supply remains limited and collateral remain relatively scarce.
Yes, and with that backdrop, it's understandable why current coupon spreads tightened another four basis points last week.
According to our fair value framework, we're now approaching the tighter end of the projected range, although we are still inside of it.
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