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Has Fannie Mae Become a “Volatility Time Bomb?”
We believe Fannie Mae is a volatility time bomb. Once interest rates move, based on the current market/economic situation at that time, and Fannie Mae’s duration gap gets close to exceeding their +/-6 month preferred range, their hedging activity will “go geometric.” They cannot afford to let their duration gap slip outside this preferred range again or they risk looking like they have “lost control” of their interest rate management process.