Volatility, negative convexity, and the bond market's paradigm shift. In the wake of Friday's better-than-expected 203,000 non-farm payroll report, the Wall Street Journal's Jon Hilsenrath reported that with the better economic news that preceded this data, the Fed is likely to begin to scale back on its controversial $85 billion per month bond-buying program. Thus while the headlines focused on the torrid rally in stock prices, in light of this interpretation, the real story of the day was the reaction in the bond market and more specifically the mortgage-backed security (MBS) market. The initial knee-jerk reaction ... (full story)