Wouldnt it depend on whether the option is in or out of the money? If rates move away from par, then vega will go down. If they move towards par, vega goes up. Isn't their convexity highest when they are at par?
You are right. let me rephrase my question. In present environment when most of the mortgages are refinanced on low interest rates, an increase in interest rates will increase the vega(makes less negative) of MBS holder.-A
