But hyperscaler bonds are in decent shape, says Harley Bassman

For sale signs are posted in front of condominiums for sale on July 09, 2026 in Los Angeles, California. Harley Bassman, bond-market veteran, has a dim view of mortgage-backed securities as an investment.

Mortgage-backed securities are increasingly risky for investors - a development that could start to bleed into the overall fixed-income market, warned bond-market veteran Harley Bassman.

The creator of the closely watched MOVE Index, a volatility gauge, pointed to a flattening Treasury yield curve as one big reason risks to mortgage bonds are rising, in an interview with the MacroVoices podcast that published Thursday.

"When the yield curve flattens or inverts, mortgage bonds widen. The option becomes worth more, and mortgage bonds become more negatively convex. And what you've seen happening right in the last two months, three months, is the yield curve flattening," said Bassman, the author of The Convexity Maven newsletter.

The yield curve, the spread between the yield on the 2-year U.S. Treasury notes BX:TMUBMUSD02Y and the 10-year Treasury note BX:TMUBMUSD10Y, helps determine the pricing of bonds as it flags expected interest-rate changes. That curve has been flattening this year, indicating tighter monetary conditions and/or investor uncertainty over the economy.

This flattening is a problem for market values of mortgage-backed securities because it pushes down expectations for long-term interest rates. Homeowners' prepayment options become more valuable, which exacerbates negative convexity for mortgage bonds.

Negative convexity means potential price gains for investors from the bond are capped by falling interest rates because borrowers can pay off their loans long before maturity. Conversely, declines in valuations of mortgage-backed securities are magnified when interest rates are rising.

"And so mortgage bonds are becoming more negatively convex, and that's why you have this wider spread from basically mid-95 to 110 [basis points over Treasury securities]. And if the curve keeps inverting, it's going to get worse," said Bassman.

"The mortgage market is going to start to have an impact on the overall fixed-income market, because the mortgage market makes up [maybe] a quarter of the of all issuance out there."

Bassman said a few years ago most mortgages were hovering at low interest rates, with valuations deeply discounted as refinancing looked less likely. But over a third of the market has been pushed into higher-coupon bonds created as interest rates have moved higher. He said that with those bonds now trading near face value, their valuations will be extremely sensitive even to small shifts in interest rates.

Volatility is also a problem for holders of mortgage-backed securities. He compared it to an options strategy referred to as a covered call. That refers to an investor selling a call option - the right to purchase an asset at a specific price and specific time - on a security they already own to earn extra income.

What drives that call option for mortgage bonds is how close current interest rates are to the actual mortgage rate of the homeowners whose loans back the mortgage bonds, and daily volatility for interest rates. The mortgage-bond spread has widened because of big swings in volatility for interest rates as measured by Bassman's MOVE index and a yield curve that is suggesting a big wave of refinancing is likely.

The bond veteran touched on another sticky point for markets - the amount of AI and hyperscaler-related bonds being issued by companies.

"Do I think can we get higher rates because of their borrowing? Yes. But these guys have - most of them have - underlying cash machines that could certainly cover the cost of the debt," said Bassman.

"Anthropic is not borrowing the money. The other guys are borrowing the money to use Anthropic's products. So can Anthropic go bust? Sure, but that's an equity problem not a bond problem," he said

"I think Meta, Google, Amazon, Microsoft [and] Oracle have plenty of cash flow coming on through to fund, to make the coupon payments and pay these things back over time. It doesn't mean their stocks [are] not going to go down, but I think the bonds are solid," he said.

"I just don't see a bankruptcy with the hyperscalers. They all have underlying core businesses that are very profitable."

-Barbara Kollmeyer