The Structural Change in Mortgage–Treasury Spreads during the Credit Crunch

Abstract

Traditionally, the MBS and Treasury markets have been intertwined so closely that hedging of mortgage portfolios could have been done solely by Treasury derivatives. With the credit crunch in 2007, the spread between mortgage rates and Treasuries strayed from the historical stable pattern. In this study, a cointegration model is used to explain the structural change in the Treasury–mortgage spread during the credit crunch period. ABX derivatives should be proposed as a necessary additional instrument for hedging mortgage portfolios.