In a recent note, Goldman Sachs examines the potential impact of a significant build-up in mortgage holdings on the market dynamics of active mortgage convexity hedgers. The investment bank estimates that a $200 billion increase in mortgage holdings could boost the holdings of these hedgers by around 25%, leading to increased paying and receiving flow in a 50 basis point rally or sell-off.

To better understand the implications of such an event, Goldman breaks down the potential impact on swap spreads, using different instruments such as swaps and swaptions versus Treasury futures. The investment bank finds that heavier use of futures could undercut the initial impact on spreads and/or the extent of spread/rate directionality as rates move.

The blog post goes on to highlight the potential amplifying effect of mortgage holdings on larger market moves, as well as the possibility of widening swap spreads in certain parts of the curve. The analysis serves as a reminder of the importance of monitoring market dynamics and understanding the potential impact of large-scale events on the financial sector.