Convexity, convexity, convexity. That's all mortgage-backed securities players are talking about in this pre-holiday, gift-buying season. And one thing is for certain: the mortgage market's convexity is at an all-time low. It makes perfect sense: when you have a rapid rally, durations shorten and mortgage delta hedgers - that's MBS lingo for people who compensate for short durations by taking off some of their short by buying back Treasurys - have a much bigger demand for duration. But whether they're taking off their shorts or not, the word of the day is undoubtedly, convexity.

"The mortgage market's convexity sucks," said one straight-to-the-point investor. "Perhaps mortgages are outperforming Treasurys because swaps are in so dramatically, but mortgages have been the last boat in' recently. Lots of dealers use the 10-year to hedge their mortgage books, and buying begets buying, and selling begets selling."

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