Hedging Flows Supporting Treasury Rally May Have Further to Go

February 1, 2020 by Stephen Spratt

The coronavirus-fueled slide in Treasury yields may have triggered a phenomenon known as convexity hedging — which also means there could be further downside.

The 10-year yield had held within a range of about 1.70% to 1.95% since October, before heading lower late last week as concerns about the spread of coronavirus from China sent investors searching for safe havens. The break below 1.70% on Friday appears to have spurred convexity hedging flows from a variety of market players, adding fuel to the rally, according to TD Securities. What’s more, those flows may exacerbate further declines in yields.

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Originally Posted at Bloomberg on January 28, 2020 by Stephen Spratt.