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'Pretty incredible' changes in bond market coming

Parse Janet Yellen's comments any way you want, but know one thing: This is likely to be an interesting year for bond investors.

Financial markets last week took a jolt over comments from the Federal Reserve chair that traders immediately interpreted as the precursor for rate hikes that would come sooner than expected.

While there seemed to be just as many experts as not saying that the rate anxiety was justified, behind the scenes fixed income pros prepared for changes ahead.

"Investing in fixed income today is almost the exact opposite of what it was last year," Rick Rieder, chief investment officer of megamoney manager BlackRock's Fundamental Fixed Income group and co-head of Americas Fixed Income, said at a media briefing the day after Yellen's remarks. BlackRock manages $4.3 trillion for clients.

Federal Reserve Board Chair Janet Yellen speaking at a news conference March 19, 2014 at the Federal Reserve Board in Washington.
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Federal Reserve Board Chair Janet Yellen speaking at a news conference March 19, 2014 at the Federal Reserve Board in Washington.

"We're literally running almost the exact opposite position we ran last year, which is pretty incredible," he added.

(Read more: Yellen indicates rate hike sooner than expected)

That means, he said, opportunities in longer-dated bonds, likely some minor moves in shorter-dated maturities, and danger in the so-called belly of the curve around the three- to seven-year duration.

After getting pummeled in 2013, U.S. government bonds have had a better year in 2014. The iShares Barclays 20 Year Treasury Bond exchange-traded fund is up nearly 6 percent, easily outdistancing its counterpart 1-3 Year Treasury Bond Fund, which is mostly flat for the year. The iShares Barclays 7-10 Year Treasury Bond Fund has gained about 1.5 percent.

Rieder thinks longer-dated bonds will stay strong as the Fed continues the gradual pullback of a monthly bond-buying program that had its greatest focus at the short end of the curve.

"The distortion last year was in the long end of the curve," he said. "The distortion today is in the front end of the curve."

(Read more: 'Summer of discontent' brewing for market: Pro)

That's by no means to suggest the argument is settled.

There has been plenty of debate over just what Yellen meant by saying Wednesday that the "extended period of time" that the Fed would wait to raise interest rates after the end of the monthly bond buying meant six months, which in turn was sooner than the market had anticipated.

The knee-jerk market reaction saw a sharp selloff in stocks and a surge in bond yields, especially the five-year Treasury. That trade quickly unwound, though, as equities rebounded to new highs and bond yields steadied through the rest of the week.

(Read more: Fed's Fisher: We have exhausted efficacy of QE)

Rieder found a middle ground—belief that the remarks were a precursor to higher yields, but with a feeling that Yellen deserved a pat on the back, not scorn, for telling the market to prepare itself.

"What happened was people started to realize and the rate curve started to realize ... we're not in unusual times," he said. "The rate curve can shift to normal."

He gave Yellen an "A minus" for the first news conference of her first tenure as Fed chair.

A similar sentiment found root elsewhere in the feeling that Yellen should start preparing the market for changes in Fed policy if economic growth continues, unemployment falls and inflation normalizes.

"We didn't think (Yellen's) admission that 'considerable period' meant six months or so warranted the subsequent equity sell-off," Paul Ashworth, chief U.S. economist at Capital Economics, said in a note. "It simply confirmed what we already knew, that the first rate hike would be coming in mid-2015. What we found more disconcerting was her attempt to downplay the significance of the explicit fed funds rate projections made by officials."

The latter reference is to the "dots" on the Fed's economic projections that accompanied the March statement. They indicated that among Fed officials, expectations for a funds-rate increase had moved up a bit.

(Read more: Private equity pro: 'There may be some bubbles')

Jason Shoup, Citigroup's head of U.S. investment grade credit strategy, said the Fed has a difficult road ahead but believes the landscape could provide good opportunities in high-grade bonds.

"At the short end, it's the consensus nature of the position that we find alarming given interest rate volatility in the front end looks set to climb on the back of Fed guidance," Shoup said in a note. "Frankly, after (last) week's Fed meeting it now seems as if Yellen's reign might produce an upset or two."

—By CNBC's Jeff Cox. Follow him on Twitter @JeffCoxCNBCcom.

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