Unstoppable Bond Market Renders Models Useless

Traditional models fail to explain the resilience of $100 trillion market as central banks suppress short-term interest rates.

If the insatiable demand for bonds has upended the models you use to value them, you’re not alone.

Just last month, researchers at the Federal Reserve Bank of New York retooled a gauge of relative yields on Treasuries, casting aside three decades of data that incorporated estimates for market rates from professional forecasters. Priya Misra, the head of U.S. rates strategy at Bank of America Corp., says a risk metric she’s relied on hasn’t worked since March.

Based on the old model, last updated on March 31, the term premium on 10-year notes was 0.25 percentage point, versus 0.96 percentage point on the same day using the current methodology. The reading was at 0.67 percentage point last week.

The researchers declined to comment beyond the blog post, according to Eric Pajonk, a spokesman at the New York Fed.

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