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

Just last month, researchers at the Federal Reserve Bank of NewYork retooled a gauge of relative yields on Treasuries, castingaside three decades of data that incorporated estimates for marketrates from professional forecasters. Priya Misra, the head of U.S.rates strategy at Bank of America Corp., says a risk metric she'srelied on hasn't worked since March.

After unprecedented stimulus by the Fed and other central banksmade many traditional models useless, investors and analysts alikeare having to reshape their understanding of cheap and expensive asthe global market for bonds balloons to $100 trillion. With theworld's biggest economies struggling to grow and inflation nowherein sight, catch phrases such as “new neutral” and “no normal” aregaining currency to describe a reality where bonds are rallying themost in a decade.

“The world's gotten more complicated, and it's a littledifferent,” James Evans, a New York-based money manager at BrownBrothers Harriman & Co., which oversees $30 billion, said in atelephone interview on May 30. “As far as predicting direction upand down, I don't think they have much value,” referring tobond-market models used by forecasters.

With the Fed paring its $85 billion-a-month bond buying program thisyear and economists calling for the five-year-long U.S. expansionto finally take off, Wall Street prognosticators said at the startof the year that yields were bound to rise as central banks beganemploying tighter monetary policies.

Instead, investors poured into bonds of all types as globalgrowth weakened, disinflation emerged in Europe, and tensionsbetween Ukraine and Russia intensified.

Globally, bonds have returned an average 3.89 percent this yearfor the biggest year-to-date gain since 2003, index data compiledby Bank of America Merrill Lynch show. The advance decreased yieldson 10-year Treasuries by more than a half percentage point to 2.48percent, the fastest pace over the same span since 1995, whileborrowing costs for the riskiest U.S. companies tumbled to a record5.94 percent last week.

Benchmark Treasury 10-year note yields rose one basis point, or0.01 percentage point, to 2.49 percent as of 8:02 a.m. New Yorktime.

In developed countries, benchmark yields in 24 of 25 nationstracked by Bloomberg have fallen this year, with those in Italy andSpain closing below 3 percent for the first time.

'How Wrong'

“I don't expect the consensus to be right; I'm just surprised byhow wrong it has been,” Jim Bianco, president of Chicago-basedBianco Research LLC, said by telephone on May 28.

The seemingly unstoppable rally has caused bond-marketprofessionals to reassess whether they're using the righttools.

At the New York Fed, researchers Tobias Adrian, Richard Crump,Benjamin Mills, and Emanuel Moench on May 12 released an updatedmethodology for a metric known as the term premium, which can beused to determine whether 10-year Treasuries are cheap or expensiverelative to short-term rates.

After stripping out all human predictions and using only marketprices to calculate future expectations, the researchers found theextra yield longer-term Treasuries offered has been “considerablyhigher since the onset of the financial crisis” than previousmodels, according to their blog post that included the data. Thatmay be because the metric now suggests the Fed's short-terminterest rate may not rise as high as survey-based resultspredicted, wrote the economists.

Based on the old model, last updated on March 31, the termpremium on 10-year notes was 0.25 percentage point, versus 0.96percentage point on the same day using the current methodology. Thereading 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.

Bank of America's Misra says she stopped looking at the gapbetween the rate on 10-year interest-rate swaps and yields onbenchmark government debt as a measure of risk.

The gauge, which usually widens as investors seek out havenassets in times of stress, is being distorted as those betting onlosses in Treasuries have unwound their trades, she said.

Hedge funds and other large speculators cut their net shortpositions in 10-year note futures by the most since February as ofMay 27, according to data from the U.S. Commodity Futures TradingCommission. Primary dealers, which had net short positions in Marchfor the first time since 2011, have since reversed those wagers,data compiled by Bloomberg show.

Forced Buying

“Everyone is short and they are forced to cover,” Misra said bytelephone on May 28.

While economists and strategists have reduced their yieldforecasts, they're still sticking to the view that borrowing costswill end the year higher as the economy gains momentum.

They now see yields on 10-year Treasuries rising to 3.25 percentby year-end as the economy accelerates 3.1 percent in 2015,estimates compiled by Bloomberg show. At the start of the year, themedian yield forecast was 3.44 percent.

Investors risk becoming lulled into complacency by six years ofnear-zero U.S. interest rates at a time when yields are so low,according to Zach Pandl, the Minneapolis-based senior interest-ratestrategist at Columbia Management Investment Advisers, whichoversees $340 billion.

Pandl, who developed his own version of the term premium,maintains that U.S. government bonds are too expensive.

“The Treasury market is overvalued,” he said by telephone on May28. “The funds rate has been at zero for so long so it becomesdifficult to envision it being higher at all. Monetary policy iscloser to exit.”

Traditional models are failing to explain the resilience offixed-income assets as central banks led by the Fed pump trillionsof dollars into their economies and suppress short-term rates athistorical lows, according to Bianco.

The Fed, Bank of Japan, and Bank of England all havequantitative-easing programs in place, while at least two dozennations have dropped benchmark rates to 1 percent or less.

“The biggest mistake for people is they think interest rates aremerely a projection of where the economy is supposed to go,” Biancosaid. “It's the Fed and the way they have changed the marketplace.”He foresees that yields on 10-year notes will end the year at 2percent to 2.5 percent.

Fed Chair Janet Yellen said on May 7 there will be “considerabletime” before the central bank raises its benchmark rate as slack inthe jobs market keeps inflation below its 2 percent target.

Household spending declined in April, while the world's largesteconomy contracted in the first quarter for the first time since2011, government reports showed last week.

“Given the outlook for the global economy and inflation, bondsare not a bad place to be,” Gary Pollack, the New York-based headof fixed-income trading at Deutsche Bank AG's private-wealthmanagement unit, which oversees $12 billion, said in a telephoneinterview on May 28.

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