Strategies · Library · Structured assets
§11.7Carry
Mortgage-backed security (MBS) trading
Buy pass-through mortgage bonds and hedge their rate sensitivity with interest rate swaps. The main leftover risk is prepayment: when rates fall, homeowners refinance and the bond's price gains are capped. Hedge sizes come from a prepayment model or from fitting history.
- Asset class
- Structured assets
- Held for
- Months
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Mortgage pool yield and the slope of bond price against the five-year swap rate.
- Entry and exit
- Buy the pass-throughs, put on the swap hedge, and revise the hedge as rates and prepayment speeds change.
- Sizing
- Swap notional set from the estimated price sensitivity to the swap rate.
How it fails
- Prepayment speeds change
- Negative convexity
- Hedge model error
Data it needs
- MBS prices
- swap rates
- prepayment data
ARCANE has no MBS prices or swap rates; MBS ETFs such as MBB could stand in only loosely.
How ARCANE uses it
A Call on mortgage rates or housing stress could mention prepayment risk as context.
Needs swaps and mortgage data; a long-only ETF proxy would drop the hedge.
Filed under the carry card
Own what pays more than it costs to finance (the return if prices stand still) and sell what pays less, across currencies, bonds, commodities and stock indexes.
A paper plan from this card holds 21 to 252 days, stops at 2× the expected move and uses at most 75% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §11.7, p. 101 of the SSRN version. Described in our words. Carry is ARCANE’s filing, not the book’s.