The flattening of US Treasury yields may be a signal that the Fed's shift from a super dove to a hawk beyond most expectations could be "unbearable for the economy".

Falling first and then rising does not mean resetting:

Cut interest rates first and then raise them, and even by the same magnitude, investor confidence will not return to pre-easing levels. An analysis of interest rate cuts since 1997 shows that in an economic crisis frightening enough for the Fed to respond significantly-such as letting the Fed cut its benchmark interest rate by more than 100 basis points within a year-real interest rates will never fully return to their previous levels. This may reflect declining productivity, deteriorating demographics or increased investor preference for the safest assets, or all three. Real interest rates soared on Wednesday after the release of the Fed's hawkish bitmap, but have barely moved since.

The term premium didn't work.

When inflation expectations rise, the maturity premium tends to rise; this premium is an extra reward for investors to hold longer rather than shorter periods. However, the premium on Adrian, Crump & Moench 10-year Treasuries has shrunk to about 40 basis points from its peak in March. This reaction is yet another sign of a lack of investor confidence.

Look for convexity:

The shift in the Fed's position has led to a shift in fixed-income portfolio positions. It is usually characterized by structural changes that involve a long period of time, and fund managers are likely to be adjusting their positions and building the convexity of their portfolios to increase interest rate volatility. Convexity is a second derivative, which reflects the change of the sensitivity of bonds to interest rate changes, and is more obvious in large and sudden changes.

The establishment of convexity may be the most optimistic outcome for the economy-because it shows that the market is in an adjustment phase rather than a permanent change.

This article, extracted from the Bloomberg Markets Live Market Review, represents only the author's personal views and does not constitute investment advice.