During last month's US bond market selloff, portfolio managers including Vishal Khanduja at Morgan Stanley detected the reemergence of large convexity hedging flows from mortgage servicers and MBS holders. As rates rise and prepayment expectations fall, these entities extend duration and must sell Treasuries or receive fixed in swaps to hedge, creating self-reinforcing selloff dynamics that can move markets significantly.
For Armada's traditional repo desk, these flows introduce collateral price volatility at precisely the moments when counterparties may face margin calls. Treasuries and agencies used as repo collateral can gap in value intraday, creating operational stress in margin management. This is particularly acute mid-quarter when dealer balance sheets are constrained and FICC margin buffers are thinner.