Mortgage Security Hedgingand the Yield Curve - FEDERAL RESERVE BANK of NEW YORK

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Quarterly Review

Mortgage Security Hedging
and the Yield Curve

Summer-Fall 1994Volume 19, Number 2

Authors: Julia D. Fernald, Frank Keane, and Patricia C. Mosser>

The authors find that the use of Treasury securities to hedge mortgage-backed security extension risk may have magnified increases in long-term interest rates after the tightening of monetary policy in early 1994. Substantial increases in the duration of mortgage securities appear to have caused realignments of hedges and portfolios that, in turn, had a significant impact on the short-run movements of the Treasury market, particularly for ten-year securities. This phenomenon may have altered the short-run dynamics of the yield curve and thus changed the transmission of monetary policy.

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9 pages / 674 kb

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