Global bond market has been spooked and big interest rate slide not likely to be over yet

The Fed left interest rates unchanged after its meeting Wednesday, but released new forecasts showing no more interest rate hikes this year, down from a prior forecast for two more. It also said it would end its program to unwind its balance sheet in September.

“There’s no doubt the Fed caught people by surprise by pivoting more last week to lean more dovishly than even we, or others with a dovish view expected,” said Julian Emanuel, BTIG head of equity and derivatives strategy.

Bond pros said some of the week’s market moves have been perplexing, and many blamed them on quarter end portfolio maneuvers and on other technical factors, such as convexity buying or hedging.

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.

“{The Fed] was the catalyst that opened up the window…It’s more about what did the Fed know and what are they worried about. They pulled a 180, and they pulled another 90 degrees on easing last week. What is they they know that they’re not telling us,” said Andrew Brenner of National Alliance. “What you have here is a fear of something happening in Europe. Even Draghi this morning make comments that he’s very worried.”

European Central Bank President Mario Draghi spoke ahead of the U.S. market open Wednesday, and yields at that point fell to their low of the day when he suggested he could give some relief to banks on negative rates, said Peter Boockvar, chief investment strategist at Bleakley Advisory Group.

“That implies if he makes a tweak, he’ll be able to deal with negative rates for longer. I think that ‘s why you got anotehr leg down on European bond yields, which are dragging our yields lower,” Boockvar said.

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 pressure could remain on yields, the worst of the moves could be coming to an end. Strategists said some of the technical factors should fade as the quarter end passes.

Although Treasury yields hit a fresh intraday low, the fact that the market saw sellers was encouraging, as yields regained some ground. Strategists also pointed to a weaker 5-year auction Wednesday afternoon, after Tuesday’s strong demand for 2-year notes.

“This is encouraging that we might be finding a footing, but it’s too soon to tell,” said Mark Cabana, head of U.S. short rate strategy at Bank of America Merrill Lynch.

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.

“I think it’s a little bit of feeding off of itself in terms of concerns. The questions we’ve been asking yourself is what’s changed in the past week. The things that have changed are the Fed’s reaction function, or their outlook. It’s a lot more dovish than we thought. Their outlook is a little less optimistic than we thought,” said Cabana. He pointed to the negative German but said the outlook is just slightly worse than it had been.