Positive Convexity

Updated 2026-05-17

Positive convexity describes a favorable characteristic of a bond's price-yield relationship. It indicates how the bond's Duration (Bonds), a measure of its interest rate sensitivity, changes with fluctuations in interest rates.

Characteristics

When a bond exhibits positive convexity:

• Its duration decreases as yields increase.
• Its duration increases as yields decrease.

This dynamic has specific implications for the bond's price movements:

• The bond's price will decrease less when yields rise than if yields had fallen by the same amount.
• The bond's price will increase more when yields fall than if yields had risen by the same amount.

Investor Benefits

The price/yield curve for a positively convex bond is considered "normal" because it bends away from the duration line in a way that benefits the investor. This characteristic is generally preferred by investors for several reasons:

• Greater Price Stability: In rising interest rate environments, the bond's price declines are mitigated.
• Enhanced Gains: In falling interest rate environments, the bond experiences larger price increases.

These benefits make positively convex bonds more attractive compared to bonds with Negative Convexity (MBS).

References

1. Vanguard. "Negative convexity in municipal bonds: The new rate regime and ..." corporate.vanguard.com.
2. Touro University. "9.38 Negative Convexity – Fixed Income Mathematics." touro.pressbooks.pub.