The return of confidence and healthy growth in the US risks setting off a “bond crash” comparable to 1994 and triggering a string of upsets across the world, Bank of America has warned.
The US lender said investors face a treacherous moment as central banks start
fretting about inflation and shift gears, threatening a surge in bond yields.
This happened in 1994 under Federal Reserve chief Alan Greenspan when yields
on US 30-year Treasuries jumped 240 basis points over a nine-month span,
setting off a “savage reversal of fortune in leveraged areas of fixed income
markets”.
A similar shock this year is “likely” if the US economy
continues to gather strength. “The moment we hear the first rhetorical talk
of exit strategies by central banks this could turn,” said chief investment
strategist, Michael Hartnett. There was already a whiff of this in the most
recent Fed minutes.
“The period of Maximum Liquidity is close to an end. Yes, the Japanese
reflation is gaining steam in 2013 but we regard this as the last of the
great reflations. The big picture is a transition from deflation to normal
growth and rates,” he said.
The 1994 bond shock - and seared in the memories of bond-holders - ricocheted
through global markets. It bankrupted Orange Country, California, which was
caught flat-footed with large bond positions. It set off the Tequila Crisis
in Mexico as the cost of rolling over `tesobonos’ linked to the US dollar
suddenly jumped. (more)
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