Answer: Interest-only (IO) strip at low yields

An **IO strip** can have **negative DV01** because its value tends to **increase when yields rise**. Higher yields generally slow prepayments, leaving more interest payments outstanding for longer, which benefits the IO holder. This effect is most pronounced when yields are **low**, because prepayments are more sensitive to rate changes and the IO’s cash flows are more exposed to changes in prepayment behavior. Therefore, the most likely instrument to exhibit a **negative DV01** is **B) Interest-only (IO) strip at low yields**.

Author: Manit Arora