Baird Fixed Income Insights: Convexity Pulse
Oct 5, 2026 · 21 min · 6 segments
In this week’s Convexity Pulse, Kirill Krylov, with some help from an imaginary Steven Scheerer, examines whether September’s sharp MBS underperformance has finally created an attractive re-entry…
And unfortunately, uh, we have to start with September because this is really was a September to remember for all the wrong reasons.
The MBS index lost 96 basis point of excess return during the month, the worst result since May of 2023, while corporate excess return was basically flat-ish.
At this point, that imaginary Stephen that's sitting across the desk from me, or should be sitting, but not, so that imaginary Stephen would probably remind me that August had actually given us some hope, turned out to be false hope, 23 basis points of positive MBS excess return, followed immediately by 96 basis points negative one in September.
That, my friends, is 119 basis point swing, if my mathematical skills serve me right.
The unpleasant distinction is that mortgage investors could see this one coming and still somehow hit the broadside.
Within conventionals, fives, five and a halves, and sixes were particularly weak, while GNIE four and a halves through five and a halves managed to make an already unpleasant month, well, even worse.
Stephen would probably say, "So after all that pain, at least mortgages must finally be cheap, right?" And this is where I disappoint my imaginary Stephen, which by the way, sounds nothing like a real Stephen.
Broad MBS OS widened 14 basis points to 43 basis points, which is, by the way, almost three standard deviations wide to recent history.
Higher Treasury yields, elevated volatility, persistent inflation, and extension risk, now admittedly, diminishing extension risk, but still present extension risk, precisely the conditions in which mortgages should demand more compensation, much more at that.
The 30-year basis have widened to roughly 126 basis points, which is a very different starting point from where we were only a couple of weeks ago, really.
Investors who had been reducing mortgage exposure are beginning to ask a very different set of questions.
Is this finally the re-entry point? Which coupons should we add? Has enough damage been done to move in style? To borrow from a famous movie, Jaws, the sharks are circling.
Now, imaginary Stephen would say, "You realize that generally, it ends badly for somebody." Thank you, Stephen.
The uncomfortable part is that our own fair value model still isn't fully on board.
And unfortunately, uh, we have to start with September because this is really was a September to remember for all the wrong reasons.
The MBS index lost 96 basis point of excess return during the month, the worst result since May of 2023, while corporate excess return was basically flat-ish.
At this point, that imaginary Stephen that's sitting across the desk from me, or should be sitting, but not, so that imaginary Stephen would probably remind me that August had actually given us some hope, turned out to be false hope, 23 basis points of positive MBS excess return, followed immediately by 96 basis points negative one in September.
That, my friends, is 119 basis point swing, if my mathematical skills serve me right.
The unpleasant distinction is that mortgage investors could see this one coming and still somehow hit the broadside.
Within conventionals, fives, five and a halves, and sixes were particularly weak, while GNIE four and a halves through five and a halves managed to make an already unpleasant month, well, even worse.
Stephen would probably say, "So after all that pain, at least mortgages must finally be cheap, right?" And this is where I disappoint my imaginary Stephen, which by the way, sounds nothing like a real Stephen.
Broad MBS OS widened 14 basis points to 43 basis points, which is, by the way, almost three standard deviations wide to recent history.
Higher Treasury yields, elevated volatility, persistent inflation, and extension risk, now admittedly, diminishing extension risk, but still present extension risk, precisely the conditions in which mortgages should demand more compensation, much more at that.
The 30-year basis have widened to roughly 126 basis points, which is a very different starting point from where we were only a couple of weeks ago, really.
Investors who had been reducing mortgage exposure are beginning to ask a very different set of questions.
Is this finally the re-entry point? Which coupons should we add? Has enough damage been done to move in style? To borrow from a famous movie, Jaws, the sharks are circling.
Now, imaginary Stephen would say, "You realize that generally, it ends badly for somebody." Thank you, Stephen.
The uncomfortable part is that our own fair value model still isn't fully on board.
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