Baird Fixed Income Insights: Convexity Pulse

In this week's Convexity Pulse, Kirill Krylov and Steven Scheerer discuss the broad recovery in agency MBS following September's selloff and why tighter valuations are making collateral selection increasingly important. They examine the growing FHA delinquency and foreclosure pipeline, including how involuntary loan removals are becoming a larger component of Ginnie Mae prepayments and creating potential relative-value opportunities in discounted collateral. The episode also explores the renewed institutional bid for mortgages, as Annaly and AGNC shift toward higher-coupon specified pools while Fannie Mae and Freddie Mac resume expanding their Agency MBS holdings.

In this week's Convexity Pulse, Kirill Krylov and Steven Scheerer discuss Truist's recent $8 billion portfolio repositioning and what the $1.4 billion accompanying loss reveals about the changing economics of bank investment portfolios and the uneven return of depository demand. The episode also explores the surprising prepayment behavior of extended-term Ginnie Mae collateral, where 40-year modified mortgages can generate unusually fast principal returns, and how combining AmeriHome servicing with loan-balance restrictions may offer more efficient call protection in 30-year 6s.

In this week’s Convexity Pulse, the very real, decidedly non-imaginary Steven Scheerer rejoins Kirill Krylov so they can discuss how changing demographics and emerging mortgage structures could reshape housing turnover and agency MBS prepayments. They examine why rising household dissolution among aging homeowners may eventually weaken the mortgage lock-in effect, and whether defeasance could allow borrowers to unlock the economic value of low-rate mortgages without conventional prepayment. The episode also explores the resurgence of hybrid ARMs as an affordability tool and the potential implications for agency issuance, along with the unusual two-sided prepayment profile of low-FICO Rocket-serviced collateral.

In this week’s Convexity Pulse, Kirill Krylov, with some help from an imaginary Steven Scheerer, examines whether September’s sharp MBS underperformance has finally created an attractive re-entry point for agency mortgages. The episode explores how temporary mortgage-rate buydowns can provide call protection while subsidies remain in place but create a potential path to principal return as they expire, and why substantial borrower equity can weaken the traditional mortgage lock-in story in deeply discounted collateral. Kirill also looks beyond headline yields in CMO floaters, using relative-value analysis to distinguish structures that genuinely offer excess yield from those simply compensating investors for cap and extension risk.

In this week’s Convexity Pulse, Kirill Krylov and Steven Scheerer examine how changing borrower behavior is creating new ways to think about prepayment protection across agency MBS. They discuss why Fannie Mae’s new proactive mortgage-insurance cancellation outreach could make existing low-rate mortgages easier for some borrowers to keep, and why seasoned 5.5s that already survived a refinancing opportunity may offer inexpensive evidence of call protection. The episode also explores why specified collateral can still add value in deeply discounted coupons, where faster housing turnover can improve pull-to-par and carry today while call-protection characteristics may provide value if rates eventually rally.

In this week’s Convexity Pulse, Kirill Krylov and Steven Scheerer discuss growing dispersion beneath the agency MBS basis, including why structurally limited supply is strengthening the relative-value case for 15-year mortgages versus 30-years. They examine Norges Bank’s proposal to add agency MBS to Norway’s sovereign wealth fund benchmark and why the broader implication may extend well beyond the potential near-term demand. The episode also explores whether remote work is an overlooked driver of housing turnover, as Federal Reserve research showing greater mobility among remote workers raises new questions about lock-in, geography, and prepayment behavior in deeply out-of-the-money mortgages.

In this week’s Convexity Pulse, Kirill Krylov and Steven Scheerer discuss why broad agency MBS valuations remain relatively neutral even as opportunities beneath the surface become increasingly differentiated. 

They examine how Rocket and CrossCountry’s unusually early move to higher conforming loan limits could signal a growing competitive race among originators and gradually reshape what investors consider large-loan collateral. 

The episode also explores why Texas may offer unusually strong turnover protection in discount MBS, as shorter homeowner tenure, elevated new-construction activity, relocation patterns, and actual mortgage speeds point toward faster non-rate-driven prepayments. They also revisit bank demand, where small banks continue to add MBS while the long-awaited large-bank bid remains elusive.

In this week’s Convexity Pulse, Kirill Krylov and Steven Scheerer are joined by Bloomberg Intelligence MBS Strategist Erica Adelberg to examine the “hidden costs of cheap” across housing and mortgage markets. They discuss why policies designed to lower borrowing costs can have unintended consequences for home prices, MBS convexity, and GSE credit risk, while exploring how VantageScore adoption and increasing originator concentration could reshape refinancing behavior. The conversation also covers the changing marginal buyer of agency MBS, the evolving role of banks and foreign capital, and how builder incentives and shifting housing affordability are changing the collateral reaching the mortgage market.

In this week’s Convexity Pulse, Kirill Krylov and Steven Scheerer discuss how rising federal debt and persistent Treasury supply could keep pressure on long-duration assets even if the Fed eventually eases, while Fannie Mae’s latest forecast pushes the expected refinancing wave further into the future. 

They examine a new wrinkle in VantageScore adoption, as updated mortgage-insurer capital requirements create different economics for VS4 and Classic FICO loans and add another layer of complexity for credit-focused specified pools. 

The episode also explores Ginnie Mae’s enhanced disclosures, which allow investors to separate FHA and VA delinquency at the pool level and more precisely analyze how serious delinquency may translate into future buyouts and par principal.

In this week's Convexity Pulse, Kirill Krylov and Steven Scheerer discuss why agency MBS can look expensive at the broad basis level while still offering compelling opportunities beneath the surface. They examine how VantageScore adoption is changing the information content of traditional low-credit-score specified pools, potentially creating new distinctions in refinance friction and call protection. The episode also explores the return of bank demand, where recent Call Report data show depositories adding agency MBS selectively through Ginnies and CMOs rather than broadly extending into conventional pass-throughs.