The bond market has been spooked and so the big interest rate slide is likely not over

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The bond market has been spooked and so the big interest rate slide is likely not over
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The Fed's March meeting was expected to have been uneventful. Instead, it set off what is now a week's worth of upheaval in global bond markets that could still have a ways to go.

The Federal Reserve's March meeting was expected to have been uneventful. Instead, it helped set off what is now a week's worth of upheaval in global bond markets that could still have a ways to go.

"Even though in {Fed Chairman Jerome] Powell's words, the Fed doesn't think they changed anything, they changed a lot, and it has just exploded through the bond market," said Ward McCarthy, chief financial economist at Jefferies."They basically have said a fed's fund rate of around 2.5 percent is normal, and a $3.8 trillion balance sheet is normal."

Convexity buying might occur when homeowners refinance their mortgages, eliminating securities that fund managers had expected to hold for several more years. The fund manager, may in turn look to the Treasury market to make up for that portfolio 'duration.' Strategist say convexity-related buying was weighing on the 10-year Treasury yield in recent sessions.

Analysts said yields could head even lower, but that a positive stream of economic data or a substantial U.S. China trade deal could help reverse the move. While some of the bond moves can be be explained away, the outstanding question is what changed to force a massive repositioning in bond holdings.

"The Fed panicked, and so the bond market panicked and it forced anyone who was short duration to start buying duration. The thing is it's just not clear what has prompted this. Part of it is that they're below their inflation target. But the measures they've taken are way out of proportion to the problems they're having with inflation," said McCarthy."Some of it was they revised down their growth forecast. Their forecast was revised down more than inflation.

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