Amid the recent rally, the mortgage market is wondering when or if convexity hedgers will re-enter the flow. Most participants agree that convexity-hedging flows will probably be back soon, though nowhere near the levels seen last summer.
"For most of us, the term convexity hedgers brings back painful memories of the carnage during the summer," said a recent Lehman Brothers report. "We don't expect to see that anytime soon. However, that doesn't mean that convexity flows will be absent from the market."