Last week saw moderate two-way flows as the 10-year Treasury yield slipped below 4%. Early week flows consisted of up-in-coupon when the yield held above 4 %, but down-in-coupon picked up later on some convexity buying when the yield held below 4%. In addition, the 15-year sector saw better support on a combination of recent cheapening as well as increased volatility concerns that would impact 30s more.
The major talk, of course, has related to hedging needs and the impact on the market. For the most part, it has been a non-event this time around, though risks are seen at the 3.90% threshold on the 10-year. In comments from Banc of America Securities (BofA) last week, analysts believe concern regarding mortgages' impact on the market if the 10-year yield moves near 4% is "overwrought." While a 3.90% yield creates a refi incentive for the massive 5.50% coupon, analysts expect "the rise in activity may be more of a business boon to mortgage originators than a panic for mortgage servicers." This is due to falling implied volatility in the rates market that suggests to BofA that the market is not at a panic 4% from the perspective of the options market.