Baird Fixed Income Insights: Convexity Pulse
Sep 28, 2026 · 27 min · 9 segments
In this week’s Convexity Pulse, Kirill Krylov and Steven Scheerer examine how changing borrower behavior is creating new ways to think about prepayment protection across agency MBS. They discuss why…
Kirill KrylovHost
Steven ScheererHost
So welcome back to Convexity Pulse, where we are apparently going to make complicated things even more complicated.
Steven, before we get into all these mortgage intricacies, let's spend maybe 30 seconds, 45 seconds, 60 seconds on macro, because I think there are two different clocks sort of running right now.
extremely quickly to any improvement in geopolitics, and we could easily get a tactical rates rally if some of the inflation premium comes out.
But fiscal deficit, defense spending, treasury supply, and term premium, they simply don't disappear nearly as fast.
So even if the front end or the belly of the curve gets some relief, I am not convinced that long end simply follows along.
That's why I'd be cautious about interpreting any de-escalation rally as an all-clear for duration.
The 10-year has already moved above 5%, mortgage rates are back above 7%, and volatility has picked up significantly.
We may dodge one bullet, but unfortunately, there are several others still coming.
So welcome back to Convexity Pulse, where we are apparently going to make complicated things even more complicated.
Steven, before we get into all these mortgage intricacies, let's spend maybe 30 seconds, 45 seconds, 60 seconds on macro, because I think there are two different clocks sort of running right now.
extremely quickly to any improvement in geopolitics, and we could easily get a tactical rates rally if some of the inflation premium comes out.
But fiscal deficit, defense spending, treasury supply, and term premium, they simply don't disappear nearly as fast.
So even if the front end or the belly of the curve gets some relief, I am not convinced that long end simply follows along.
That's why I'd be cautious about interpreting any de-escalation rally as an all-clear for duration.
The 10-year has already moved above 5%, mortgage rates are back above 7%, and volatility has picked up significantly.
We may dodge one bullet, but unfortunately, there are several others still coming.
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