As the mortgage market is closer to being "in the money" from a refinancing perspective, Goldman Sachs notes increased negative convexity. In fact, according to the bank, mortgages are being traded with more negative convexity than models suggest (specifically for lower coupons). Goldman argues that extension is currently the dominant risk in the market.

To illustrate this, the firm examined the performance of the coupon stack since the start of 2003, looking at daily price and OAS changes as well as the corresponding yield changes.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.