Bayview Asset Management -Tue, 03/31/2026 - 13:23

Managing Mortgage Loan Convexity Risk

Residential mortgage loans can offer attractive yield and capital efficiency for insurance investors, but their structure embeds prepayment optionality that introduces asymmetric risk. Effectively managing negative convexity is therefore critical to preserving value across rate environments.

This paper examines how borrower behavior, interest rate movements, and loan-level characteristics interact to shape prepayment dynamics and convexity risk. It highlights the role of advanced modeling techniques, including loan-level analysis across multiple rate paths, in quantifying sensitivity and supporting more informed asset selection.

The analysis also explores structural factors that may mitigate convexity risk, including borrower profile, loan attributes, and prepayment penalties, and considers their implications for portfolio construction. By integrating credit and interest rate considerations, insurers can better position portfolios for stability and risk-adjusted performance.

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Contacts

Bayview Asset Management

Bayview Asset Management, LLC’s Insurance Asset Management (IAM) group combines Bayview’s premier residential mortgage loan origination and Asset Based Finance (ABF) platforms with portfolio managers who have decades of experience managing insurance assets. We deliver customized, capital efficient investment solutions that align with insurers’ liability profiles and risk/return objectives by combining bespoke data and modeling, market insights, and critical sourcing relationships with disciplined pricing and execution.

Alex Latella
Senior Vice President, Insurance Asset Management
alexlatella@bayview.com
+1.917.419-9152

bayview.com
4425 Ponce de Leon Boulevard
Coral Gables, FL 33146

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