Never Mind Yield Curves, What’s Negative Convexity?

As bond yields rise and fall past certain levels, there are episodes of highly technical yet increasingly familiar flows that can accelerate moves in either direction. Analysts and traders use terms like negative convexity and convexity hedging to explain a phenomenon that’s been compared to a “beast” in the market. The result can lead to market distortion that makes it tricky to interpret what bond markets are really saying. What does it all mean, and why does it matter?

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