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A Primer on the Convexity Trade: What it is, Who does it, and Why
If you don’t trade in mortgages or agency securities, why should you care about what Fannie or Freddie is doing? Simply, we believe the convexity trade is the primary driver of volatility in the bond market. This trade is neither bullish nor bearish. Rather, it enhances volatility – in both directions. Why? Fannie and Freddie are far and away the two largest players in the bond market and when the convexity trade forces them to get active, they affect the entire market.