Explanation

Low premium mortgage pass-through securities exhibit negative convexity due to prepayment risk. When interest rates fall:

• U.S. Treasury bonds show positive convexity - their prices rise more than proportionally as rates fall
• Mortgage pass-throughs with low premiums experience increased prepayment risk as homeowners refinance at lower rates
• This prepayment risk creates price compression - the price increase lags behind comparable duration Treasury bonds
• The security's effective duration decreases as rates fall, limiting price appreciation

This behavior is characteristic of mortgage-backed securities and reflects the embedded prepayment option held by homeowners.