(FORTUNE Magazine) – The latest game on Wall Street? Trying to pinpoint what's behind the sudden run-up in interest rates. Long-term rates have climbed nearly 1.3% since mid-June. Is the market getting spooked by mounting deficits? Or is the move simply a harbinger of a strong economic rebound? While conflicting theories abound, there's another new factor at work: "convexity selling."

It's complicated, but here's what's happening: When rates fall, mortgage investors don't earn as much income from their portfolios, and they buy Treasury bonds as a hedge. When rates rise, they unload bonds because the value of Treasury bonds drops as rates go up. The rapid rate spike caught institutional mortgage investors off guard, and the result has been a fierce rush over the past few weeks to cover exposed positions and sell bonds, which, in a vicious cycle, drives rates yet higher. While a first wave of selling has passed, "the rebalancing isn't done," warns Srinivas Moduki, a bond analyst at Lehman Brothers. "If rates move again, it could trigger another wave." Convexity selling doesn't explain the yield spike, but it's sure adding insult to injury. --Anna Bernasek