US Rates Viewpoint: Primer: Callable bonds

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US Rates Viewpoint: Primer: Callable bonds

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US Rates Viewpoint

Primer: Callable bonds

Primer

Callable bonds 03 June 2026 Corrected

Callable bonds are a large part of global fixed‑income markets, in particular the GSE Rates Research

(government-sponsored enterprises) and SSA (supranational and sovereign agencies) United States

bond markets. Within the dollar universe, callables comprise about $14tn of $55tn bonds Ralph Axel

in today’s Bloomberg database (Exhibit 1). This primer looks at callable valuation, risk Rates Strategist

drivers, and practical considerations, including OAS (option-adjusted spread), volatility BofASralph.axel@bofa.com

linkages, and relative value versus bullets. Bruno Braizinha, CFA

Rates Strategist

Callables offer bond issuers the option to refinance higher-interest-rate debt into lower BofAS

rates when Treasury rates fall and/or issuer spreads to USTs (US Treasuries) decline. bruno.braizinha@bofa.com

The issuer buys back “or calls” the bond at par and issues a new bond at a lower interest EleanorRates StrategistXiao

rate. The mortgage prepayment option in MBS (mortgage-backed securities) is similar: BofAS

borrowers refinance when rates fall. Investors in callables and MBS are therefore eleanor.xiao@bofa.com

exposed to early return of their principal when rates fall, requiring them to reinvest at USBofASRates Research

lower yields. The bond investor gets paid by the issuer to accept this negative convexity See Team Page for List of Analysts

via a higher coupon. The issuer/borrower is long the option, while investor/lender is

short the option. Shorting options can increase carry.

OAS nets out option value

The market’s valuation of the embedded call option depends on the option’s structure