The possibility of an end to the FedTrade could result in market volatility, but there are ways to gauge the risk.

Previously, I explained that while most Fed watchers are focused on the federal funds rate, a more interesting topic may be the so-called “FedTrade,” which is keeping certain agency mortgage-backed securities’ risk spreads at artificially low levels.

I speculated that any decision to sell these securities—or even a market expectation that the Fed will do so—could result in more broad-based volatility.

While such moves are difficult (if not impossible) to predict, one metric that has guided our decision-making over the past few years is the Bank of America/Merrill Lynch MOVE Index, which measures implied volatility of U.S. Treasury rates across the yield curve. Conceptually, it is similar to the CBOE Volatility Index (VIX), a popular measure of the implied volatility of U.S. stocks.

The Bank of America/Merrill Lynch MOVE Index has increased due to the fear of large-scale selling during the past few years. One bout of volatility occurred in 2013 with the “Taper Tantrum,” when market participants feared that a new Fed leader would sell securities from the Fed’s balance, ending quantitative easing.

Another episode occurred during the end of 2014 and beginning of 2015, when there were large-scale redemptions (and therefore large-scale selling) from the world’s largest actively managed bond mutual fund.

However, this index did not react as violently to events at the end of quantitative easing or the Fed’s two rate hikes because those activities were well-telegraphed and did not involve large-scale selling of securities.

Thus, we think the Bank of America/Merrill Lynch MOVE Index will continue to be instructive to follow, as it may indicate when market participants fear an unexpected change in the Fed’s policies regarding FedTrade.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus, which you may obtain by calling +1 800 742 7272. Read it carefully before you invest or send money. Investing includes the risk of loss.

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This material is provided for informational purposes only and is not intended as investment advice or a recommendation to buy or sell a particular security. Any investment or strategy mentioned herein may not be suitable for every investor.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

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Copyright © 2017 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus, which you may obtain by calling +1 800 742 7272. Read it carefully before you invest or send money. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This material is provided for informational purposes only and is not intended as investment advice or a recommendation to buy or sell a particular security. Any investment or strategy mentioned herein may not be suitable for every investor.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2017 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

Statement of Financial Condition | NMS Rule 605 & 606 | Business Continuity Plan | UK Stewardship Code
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