Bond Brief: Risk Returns

But the Federal Reserve's decision Tuesday to raise the fed funds rate to 4.75% from 4.50%, along with hints that more rate hikes were on the way, sparked a slide in prices on the long end.

"Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace," said the policy-setting Federal Open Market Committee in the statement that accompanied its 15th-straight rate hike.

"The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance."

Fed funds futures now show 100% odds that central bankers will raise the target rate to 5% at their next meeting in May. Odds for a move to 5.25% in June are about 30%, up from zero last week. And Barclays Capital believes the overnight lending rate will hit 5.5% by the end of the year.

Interest rates on home mortgages and bank loans to corporations rise and fall in tandem with Treasury yields, and the eventual result of higher rates will be a slowdown in economic activity.

"A risk premium is priced in here and is here to stay," says Matthew Smith, vice president and fixed income portfolio manager at Smith Affiliated Capital. "We won't get much movement to the upside because of the amount of data that needs to come out before we can guess at [when the Fed will stop raising rates]."

Some market watchers, including Michael Darda at MKM Partners, say the bond market has been vastly overpriced, and that a correction is long overdue. He attributes low yields and high prices on Treasuries to the fact that there is a lot of easy money still floating in the world and few "safe" places to invest.