Please refer to the 2/11/09 post for details about dealer hedging procedures.
Wow, primary dealers are now outright long Treasury securities. No interest rate hedging for these guys, they have perfect information about the future I guess. Let's examine the changing risk appetite over the last nine months:
Corporate Holdings (>1 year): -54.82%
Mortgage Backed Holdings: -14.49%
GSE Debt (>1 year): -35.77%
Treasuries: went from a short position of $69 billion to a long position of $20 billion
The takeaway: dealers are trading credit risk for interest rate risk.
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