As rates increase, MBS analysts expect the market's convexity hedging needs to gradually diminish. Servicers are the only group of convexity hedgers that should remain active, MBS analysts report, although this group's convexity needs have always been less compared to originators and investors. Consequently, MBS hedging activity is expected to have less of a near-term impact on fixed-income market interest rate trends.

"Based on changes in the origination environment, a realignment of investor demand, and the current convexity position of the mortgage market, we believe there is a diminished capacity for MBS hedging activity to impact the broader fixed-income markets going forward," Bear Stearns analysts wrote in their most recent Short-Term Prepayment Estimates.

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