1994 vs 2013: Spot The Carbon-Copy Similarities

Tyler Durden's picture

The only thing that is necessary for something to happen, is for everyone to say it can't possibly happen. Such as a carbon copy replica of the 1994 bond crush. Presenting: 1994 vs 2013, or as it is better known "It can't happen... It can't happen...It can't happen...  It just happened"

And some rather spot on commentary on just this from Guggenheim's Scott Minerd, who just like us, sees the inevitable outcome of the upcoming taper (which is coming), as the untaper, i.e., even moar printing by the Chairman (or woman as the case may be in 2014).

From Guggenheim's Scott Minerd

The Fed's Bind: Tapering, Timetables and Turmoil

There are striking parallels between the dramatic recent sell-off in U.S. Treasuries and the Great Bond Crash of 1994. But the summer of volatility now facing financial markets is no doomsday scenario. Instead, it puts the U.S. Federal Reserve in a bind. Higher interest rates will reduce housing affordability, which is especially troublesome since housing is the primary locomotive of U.S. economic growth. That means the Fed, despite Ben Bernanke’s recently announced timetable, may be forced to expand or extend quantitative easing if the housing market’s response to recent events becomes more acute and starts to negatively affect the job market recovery.

At the start of June, I waxed nostalgic about the canary in the coal mine. In the aftermath of a string of downside moves in financial markets, I wrote about how early mines lacked ventilation and so miners brought caged canaries into new seams to detect deadly gasses. The story went that if the canary stopped singing, or even worse, died, the mine would be evacuated until the gas buildup could be cleared to make work safe again. My point was that markets were foreshadowing worse trouble ahead. Now, I regret to tell you, my prognosis was all too accurate. The canary is certainly dead. And, in the sudden market rout that has marked the beginning of the summer season, the chirpy yellow bird was far from the only casualty.

I see striking parallels between the dramatic recent sell-off in U.S. Treasuries and the Great Bond Crash of 1994. To make matters worse, today’s bond market is even more sensitive to fears about tightening thanks to the U.S. Federal Reserve’s unprecedented expansionary program since the 2008 crisis.

At the start of 1994, Bill Clinton signed the North American Free Trade Agreement into law, Alan Greenspan was at the helm of the U.S. Federal Reserve, and markets were optimistic. I was working in London, running European credit trading for Morgan Stanley. Our desk turned over about $500 million in credit daily. Bond yields were historically low, inflation was muted. Then, after a calm start to the year and almost without warning, bond markets suffered their largest crash since the Great Depression.

The trouble began in February when Fed Chairman Greenspan, after four years of monetary expansion, announced a seemingly innocuous 25 basis point increase in the federal funds rate. Bond markets reacted swiftly and violently, re-pricing securities based on where investors anticipated interest rates would be at the end of what markets correctly assumed was a tightening cycle. Liquidity significantly dried up, and over the next nine months, the 10-year yield rose 240 basis points. We were on the front lines of the crisis -- during those dark days, our daily volume on the trading desk shriveled from $500 million to just $15 million.

In 1994, investors were caught off guard because the duration of their positions – a great deal of which were mortgage-backed securities – was lengthened beyond their targets due to rising interest rates. Those investors used Treasuries as a means to sell duration because they were their most liquid assets. Credit spreads soon exploded as dealers lacked the ability to take on larger positions from would-be sellers. Both sides of the Street were sprinting in one direction, leading to a violent stampede for the only exit.

It appears we are witnessing a similar cascade today. The sell-off began at the start of May, as U.S. economic data suggested housing could spark a stronger economy. It continued after May 22, when Fed Chairman Ben Bernanke told lawmakers that the central bank would, in the coming months, discuss how it might approach tapering its asset purchases. Then on June 19, the other shoe dropped when Dr. Bernanke held his post-Federal Open Market Committee meeting press conference. Despite his insistence that tightening is not imminent, his guidance amounted to an outline and a timetable of how quantitative easing (QE) will be tapered, and eventually ended. Markets were caught off guard by how quickly the Fed could take away the proverbial punch bowl.

Both Greenspan and Bernanke pushed the boundaries of Fed transparency, but the way they telegraphed their messages seems to have contributed to market volatility. Greenspan’s rate increase in February of 1994 marked the first time the FOMC released a statement announcing a move in the federal funds rate, its main policy tool. And Bernanke is the first Fed chairman to hold post-FOMC press conferences, a practice he began in April, 2011. The message contained in Bernanke’s June 19 post-FOMC press conference certainly triggered the market rout that would follow.

Part of the recent correction in the bond market is the result of the readjustment of the term structure of interest rates, but most of it is due to concerned investors seeking to reduce their portfolio exposure by shedding duration, often by shorting Treasuries. Many of these investors have recently been engaged in a leveraged carry trade, meaning higher interest rates magnified the downside losses and, in the case of mortgage securities, the effect on prices was even more amplified as durations extended as a result of reduced expectations of repayment. This leveraged effect on mortgage portfolio losses explains the dramatic decline in mortgage REITs over the past weeks. While in the very near term things could improve, the situation could worsen because the rising interest rate trend looks set to continue, with a medium-term target of 3.25-3.5 percent for the 10-year note. The eventual follow-on to this will likely be a widening of credit spreads.

Rising rates will continue to reduce housing affordability, which is especially troublesome because housing is the primary locomotive of U.S. economic growth. Housing activity has been driven by artificially low mortgage rates. Housing-related activity, including private residential investment, personal expenditures on household durable goods and utilities, as well as the wealth effect on consumption from home price appreciation, has positively contributed to GDP growth for the last five quarters.

Housing activity was the sole positive contributor to economic growth in the second quarter of 2012, and it comprised over two thirds of real GDP growth in the first quarter of 2013. First quarter real GDP growth was only 1.8 percent, 69 percent of which was directly attributable to housing. Rising interest rates caused mortgage applications to fall sharply in May, and profits from new construction also faltered. The housing refinancing index has also come under pressure.

The Fed’s assumptions now include a forecast that unemployment will drop to 7.2-7.3 percent by year end. That suggests that the Fed believes economic activity will accelerate as we head into the summer. I do not subscribe to this view, since we are already seeing pressure on housing and the broader economy from higher interest rates, and the negative impact of the recent spike in yields is likely to continue to show up in the economic data over the summer. That means the Fed, despite Dr. Bernanke’s recently announced timetable, may be forced to expand or extend QE if the housing market’s response to recent events becomes more acute and starts to negatively affect the job market recovery. Consequently, it is fairly certain that QE will continue at its current rate through the end of 2013, and the Fed will likely still be carrying out asset purchases well into the second half of 2014. This view is supported by the low near-term risk of inflation.

Meanwhile Fed officials are struggling to put the toothpaste back in the tube. In the wake of Bernanke’s press conference, numerous Federal Reserve presidents have attempted to clarify or even refine the message. San Francisco Fed President John Williams, who in May said the central bank could begin tapering its asset purchases by the summer and finish them by year-end, backtracked in recent days. The centrist policymaker now says it’s too early to say when the Fed will taper and that the central bank must be certain the recovery can withstand ongoing fiscal contraction.

Another important consideration in the recent market dislocation is the value of primary dealer positions relative to the bond market’s total size. Ultra-low interest rates since 2008 spurred increased debt issuance while dealer positions in commercial paper, investment grade, and high-yield corporate bonds have declined from their peak of about $260 billion in 2007 to $69 billion today due to banking regulations. This means bond market dealer balance sheet coverage has shriveled from 4 percent of total inventory in 2007 to less than 0.7 percent of today’s $9 trillion market.

There will likely be further selling pressure when mutual funds post quarterly statements featuring losses, and as the carnage from the bond market shows up on 401k statements. These investors will not care that the risk of a recession is highly remote but will focus instead on signals from the Fed that interest rates will rise.

The New York Stock Exchange Advance Decline line is also forecasting tough times ahead. Over the long-term, equities prices will likely reflect the recovery in the underlying economy, but a stock market fall of 10-20 percent is still likely given how volatile markets have become. Uncertainty will remain elevated through the summer because we will not be able to gauge the impact higher interest rates are having on the economy until we get data in August that reflects housing activity from months earlier.

Fixed-income investors should be particularly cognizant of liquidity levels, keeping maturities short and spread duration low. High-yield spreads may widen by another 100 basis points because of the recent Treasury crash and Gold may ultimately regain its safe-haven status.

Markets are certainly under pressure, but this is not a doomsday scenario. This liquidity flush will continue to unfold, and things will likely get worse before they get better. Investors face a rough summer, but it is important to remember that even the extreme bear bond market that began in February 1994 ended before the end of that year.

This year, Treasuries began selling off in April, so if this swoon behaves like the 1994 bear market for bonds, we can expect to be out the other end by the end of the year. Certainly, I don’t think we will see any relief for lower bond prices until economic data begins to reflect a slowdown in both housing activity and price appreciation.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
howenlink's picture

History rhyming.

taketheredpill's picture

Exactly how does the 2013 Economy resemble the 1994 Economy?  In 1994 you could do things like raise fed Funds rates and slow down a Strong economy.  Today interest rates are no longer useful for implementing monetary policy.

Look at when QE1 and QE2 were started and when they were ended.  Today looks a lot more like when QE1 and QE2 were started, and nothing like when they were ended.

Bernanke realizes QE is not working, and where it is working is the wrong place (i.e. Bubbles).

Also, again, the "2013 is just 1994" is a sell-side myth designed to push more people into equities.

WarriorClass's picture

And now we learn that Michael "Mayors Against Guns" Bloomberg has purchased 2000 GUNS through a straw buyer.

Scroll down:



bigrooster's picture

I brought up this exact point a few weeks ago at a Patriot meeting here in Phoneix.  Why is Bloomberg allowed to finance the purchase of firearms across state lines but if anyone else does it is a Federal crime.  I think that the US Attorney General sould investigate this...oh wait that is Eric Holder so that is not going to happen.

Some animals are more equal than others...

Fuck you Bloomberg and fuck you Holder.  Your time will come.

CPL's picture

In 1994 the western world could still export inflation to back stop their ponzi efforts.


There is nowhere left to run now.  Everyone is painted into the same corner and the only countries left aren't biting the IMF cheedar.  Mainly because they themselves are in debt up to their eyeballs.

Panafrican Funktron Robot's picture

Just wanted to point out that the radio ads from the mortgage companies are now heavily pimping HAMP loan mods in the past week.  Stick a fork in it, the housing market is already done, and all it took was the mere suggestion that there may potentially be a reduction in QE.

Headbanger's picture

And we don't have much of any "disruptive technologies" today as we did back then with the internet, digital cell phones, etc. And there still were some good paying jobs!

Roger Knights's picture

Except Rossi's E Cat cold fusion gadget, maybe. We'll know in a year.

CPL's picture

Nobody is buying Rossi's stuff until it passes mustard other than a carefully staged demo with a press conference.  Investors and engineers won't listen until they've got it in a cooler sized power plant (because in theory it can be scaled to any size.)  If they are looking for a pay day, they could throw it all under an open source engineering license and do the honor system.  HOWEVER, they've been flogging the same tech for 25 years and for 25 years they refuse to let anyone tinker with it.

Meanwhile magnetic motors are sort of interesting.




In action making a lot of power with little more than magnets pushing a fly wheel.

Panafrican Funktron Robot's picture

That would be pretty funny, large power plants running on magnets.  That won't cause any unintended consequences.

neidermeyer's picture

Hate to be the vocabulary police here but "passes mustard" sounds like runny yellow stool. The correct phrase is "Passes Muster" ...

Yancey Ward's picture

History is a bus that runs you down, turns around and runs over you again.

Spitzer's picture

Please implode....

LawsofPhysics's picture

yes, and legalize prostitution while you are at it...


Joe Davola's picture

Heck, I'd be happy if they brought back sugary breakfast cereals - Honey Smacks, wtf I want my Sugar Smacks!

Urban Roman's picture

You can't have sugar smacks any more. You're old and diabetic, remember? 

Now drink you Ensure, it's good for you. 

El Viejo's picture

I like the Black Walnut flavored Ensure. Mmm Mmm good.

Joe Davola's picture

Bet it's really good with some Grey Goose over ice.

Temporalist's picture

At least with that tradeoff you will not mind that your shit is as liquid as piss because you'll be too drunk to give a fuck.

BLOTTO's picture

1984!...errr, '1994'...

knukles's picture

You didn't order that Greek yogurt

Save_America1st's picture

Oh they'll bring 'em back...chock full 'o tasty GMO corn!  You and the kids are gonna love the slow cancerous goodness of 'em.  Eat up! ;)

Headbanger's picture

And legalize pot so we stop wasting money enforcing stupid laws.

Herd Redirection Committee's picture

Oh they'll legalize it.  Just you wait.  But you won't be able to grow it....

roadhazard's picture

I'm sure you will be able to grow it just like you could grow tobacco if you wanted. The price will come down enough so that you would rather just purchase it.

Temporalist's picture


I'm fairly certain that there are still prostitutes even though it's "illegal."  You could always give Elliot Spitzer a call...

Renewable Life's picture

Some idiot said on one of the irrelevant financial networks yesterday, DOW 60,000 by 2020!!!! But in that euphoric fantasy, no ne asked the dipshit what commodities and PM would go to????

If that's not a hyperinflation scenario, what is???? Ya DOW 60,000 on solid fundamental growth and healthy P/E ratios, ya OK crack smokers!!! The wolves of Wall Street only hope the sheeple think so??

Did that idiot also price in unlimited federal deficits and an exploding federal debt of 30 trillion by 2020, all to keep rates low and 1.5% GDP growth over those 7 years???? Ohhh and I assume this clown predicts the USD will still be the reserve currency on the planet, which it won't!!!

That's what everyone is missing in this debate on this article, it's not 1994 because already 12% of global trade is being settled in Yuan or Gold right now, by 2014 it will be 25%, once that snowball gets rolling, it won't take long until its 75-80%!!! Then we will see what the US bond market thinks rates should be on US debt?? Can you say, 7-8% on the 10Y!!!!! And if you somehow think that Americas worn out consumer market buried in debt and inefficiencies, will be any match for a 1:25 billion person consumer market in China desperate for upward mobility, with very little individual debt, you haven't been to Bejing, Hong Kong or Shanghai in the last 5 years!!!! USD meet the British Pound, you'll be room mates now!

LawsofPhysics's picture

What garbage.  1994 was a blip in a 40+ year bull market for bonds.  Keep it simple stupid, the government must fund it's liabilities, period.  It needs cheap money to do that.  It rates continue to rise, we get a soviet-style collapse, period.  Good luck to those states that can't make ends meet (and good riddance).

TheSilverJournal's picture

And the only way to keep rates down is more QE, leading to hyperinflation. As in all ponzies, it's expand or die.

ATM's picture

Which is exactly what Minerd beleives will be the ultimate end game.

Herd Redirection Committee's picture

The rising rates trigger the hyperinflation just as much as the moneyprinting (esp. that yet to come) will play its part.

Rising rates mean banks have to start lending out their reserves at some point (otherwise they will have to eat the financing and interest costs of doing business). 

El Viejo's picture

I see a schizoid Japanese fortune cookie in the long term. Now take your Bipolar meds and chill.

espirit's picture

Au bottomed mid-1993, so what's the co-relation?

eclectic syncretist's picture

Don't you mean "in all ponzi's, it's expand UNTIL you die."?

might as well piss up a rope.


yogibear's picture

A number of states are saddled with ever-increasing public pension and benefit promises. The states and school districts will tax their citizens out of the area.

Angry White Dude's picture

FedGov will start bailing out the states via takeover of public and private pension programs through mechanisms like PBGC. Expect to see creation of "Bad Bank" style pension management programs.

gjp's picture

Total garbage, all you need to confirm that was this snippet: " Over the long-term, equities prices will likely reflect the recovery in the underlying economy".  Another recovery shill I guess.  Idiot, equities are the recovery in the economy and over the long-term the ponzi is going to collapse and destroy the whole shitshow, economy and markets together.

SheepDog-One's picture

Oh, well can't they just get by with more 'Good Fed/Bad Fed' act to manage world markets? 

It's so easy, just hint at taper 1 day and get the rush for the door, then other Fed heads come out and say 'NO NO you got us all wrong don't worry!'...and market participants become placated sheep once again and buy moar.

Very easy! Homo Sapiens species is very stupid! 

LawsofPhysics's picture

Come on SD-1, you are smarter than that.  Individually, many humans are brilliant, collectively, humans are idiots and have been devolving for quite some time.

BLOTTO's picture

Speaking of individuals...smart ones...happy bday (tomorrow) to one of the brighest ever!


Nikola Tesla!

knukles's picture

Right next to Roswell Day!
I get static tingles all down my leg.

Love that stuff....

Look up in the sky.. It's a bird... It's a plane... It's a cloud orb spraying chemtrails!
I love the sound of HAARPs in the morning

mick_richfield's picture

I always got a charge out of that guy.

SheepDog-One's picture

That's right some individual Homo Sapiens are brilliant....of course we can't have that! Unless they're easily controlled, what kind of treatment do they get? 'Kook', 'weirdo', 'terrorist'.

j0nx's picture

Liberalism and political correctness are the root of the problem. People know what they need to do to solve problems and inherently they know WHAT the problems are but they are hampered from taking action because they know they will be labeled some kind of ist for it. Racist, sexist, terrorist, etc. We know who commits the vast majority of violent crimes in the country yet we do nothing. We know who the troublemakers are in our communities, our local, state and federal government offices yet we do nothing for fear of being labeled some kind of ist. I can put on one sheet of paper what the problems are in this country and how to solve them in less than a decade yet if such a paper were ever seen by society's eyes I would immediately be branded a racist and a terrorist and some kind of radical. EVERYONE and I mean EVERYONE knows what the problems are, knows deep down that we are fucked as a species and why yet nobody does anything. I've been saying for years that political correctness would be the doom of this nation and western society in general.

Winston Churchill's picture

Can't remember if it was Juncjer or Wederman who said;

We know what needs to be done,but don't know how to be re elected

if we do it.

Time to change the canary to a signet in an oil well.

prains's picture

what you describe is neither liberal nor conservative in name so why do you insist on confusing the issue

j0nx's picture

Get outa here. Liberalism is the disease. Political correctness is just a very bad symptom that leads to death. PC is entirely an advent of the liberal mind. Just like every little kid getting a blue ribbon and trophy at the awards ceremony. In my day you were either first place or you lost. People were called out on their bullshit and shame was still something that people felt when they knew others knew their dirty laundry. Honor and pride was also something that people knew and felt. 30 years of liberal indoctrination has taken all of that away. Liberalism also has nothing to do with politics. Liberalism is a mindset, a way of life and is destructive to everything that America ever stood for.

IdiocracyIsAlreadyHere's picture

Wow you are a fully propagandized moron.  You really think that "liberals" have that much power.  And the "your either in first place or you lost" mentality is just as bad as everyone getting a ribbon for just showing up.  This creates the kind of willing serfs who believe everyone who has achieved money and power has somehow "earned" it through hard work.  Get a clue, idiot, the game is rigged and it is rigged against you no matter what Limbaugh tells you.  I laugh at you as you are just as indoctrined as any ultra PC faux progressive.  I see in you a classic high authoritarian follower so though I wish there was hope you could see beyond your preconceived notions, I know that is not realistic.  Authoritarianism  is a mindset that knows neither left nor right and you clearly a possessor of it.  Pathetic.

j0nx's picture

You aren't even worth a rebuttal. All you know how to do is call names when you don't get your way. Typical liberal. Troll elsewhere. Obvious troll is obvious.