It's 1994 Again: Why Albert Edwards Expects An Imminent "Bond Market Bloodbath"

Tyler Durden's picture

Following the Trump presidential victory, two prominent macro strategists have undergone a significant change in their outlook: while David Rosenberg, who started off with a deflationary, and bearish outlook, then flipped to inflationary (and bullish), has recently once more "mean-reverted" and expects a further drop in yields as deflationary forces return, his SocGen peer, Albert Edwards - while still expecting a deflationary "ice age" in the longer-run (in case there is any confusion, he expressly states "make no mistake. Unlike most in the markets, I remain a secular bond bull and do not think this 35 year long bull bond market is over") now expects an imminent "bond rout" in the coming weeks as the Fed's rate hike cycle leads to an aggressive selloff in short- as well as long-term rates. The result will be another "central bank-inspired recession", which will lead to the convergence of yields on the 10Y US Treasury with Japanese and European bonds below zero, as the global deflationary ice age enters the final round.

Edwards' summary of his current state of mind, just as the Fed is about to make (yet another) historic mistake, is - as usual - rather picturesque:

Make no mistake. Unlike most in the markets, I remain a secular bond bull and do not think this 35 year long bull bond market is over. I believe the US Fed has created another massive credit bubble that will, when it bursts, lay the global economy very low indeed. Combine this with the problems of a Chinese economy dependent on increasingly ineffective injections of credit to produce increasingly pedestrian GDP growth and you have a right global mess. The 2007/8 Global Financial Crisis will look like a soft-landing when the Fed blows this sucker sky high. The seeds for that debacle have already been sown with the Fed having presided over one of the biggest corporate credit bubbles in US history. All that is needed now is for the Fed to sprinkle life-giving rate hikes onto these, as yet dormant, seeds of destruction. Accelerated Fed rate hikes will cause tremors in the Treasury bond markets, forcing rates up, most especially in the 2 year – just like 1994. But as yet another central bank-inspired global recession unfolds, I  believe US 10y bond yields will ultimately converge with Japanese and European yields well below zero – in other words, buy 10y bonds on weakness!

And speaking of 1994, and the reason why Edwards is confident that despite the market "pricing in" the Fed's upcoming rate hikes, nobody has any clue what is about to be unleashed, the SocGen strategist reminds his clients of the Orange County "havoc" unleashed with the 1994 rate hike cycles.

For those few of us in the markets of a certain age, Orange County conjures up only one thing: 1994 goes down in infamy as one of the biggest ever bond market bloodbaths in history culminating at the end of the year with Orange County in California going bankrupt (younger clients in their late 20s will only know the OC as the mid-2000s teen programme based in Newport Beach, which I watched religiously with my then teenage son and daughter).


I remember the 1994 period as if it were yesterday (unlike yesterday itself). Despite the Fed telegraphing the series of rate hikes and market participants forecasting multiple hikes, it was most curious how the market went into total convulsion. I was chatting to my ?similarly young? colleague Kit Juckes about this and he reminded me that the whole yield curve gapped up some 50bp immediately! It was a bloodbath, especially for 2y paper.

For the benefit of readers who may have missed this particular episode in bond market history, Edwards here are some more details of how the 1993/1995 rate hike cycle flowed through to the bond market, and then promptly resulted in an inverted curve.

You really had to be there at the end of 1993 to understand just how widely expected the 4 February 25bp Fed rate hike was. I was at Kleinwort Benson back then and I remember articulating that rates could rise somewhat more than the market expected on our December 1993 macro European tour. There was no real pushback. I have managed to lose my Global Strategy Weekly files from that time to see exactly what I was saying then, but I have my yellowing press cuttings file! From the FT on 8 Feb 1994 I find this, “on Thursday (the day before the Fed’s first hike), Mr Albert Edwards of Kleinwort Benson  wrote: In the US, Alan Greenspan could not have been clearer. He regards 3% as an excessively low rate which has served its purpose to eliminate the banking crisis and alleviate the credit crunch. The Fed does not care what headline inflation is, rates are heading higher. The risk is that the markets do not view a ¼% rate increase in isolation but the first in a series of tightenings, which it will be”. I was not alone in that view. It was quite common on the sell-side. What though we could not anticipate was quite how savage the bond sell-off would be.

Additionally, Edwards also shares two articles from that year, first from Fortune entitled “The Great Bond Massacre of 1994” see link, and also from December, when The New York Times analysed events surrounding the most high profile casualty of that year, namely Orange County, link. In a word the problem was leverage.

Fortune Magazine wrote in 1994, “Just as in the U.S., European bond investors were operating on lots of leverage. That made them just as vulnerable when the margin calls started to come. The result: "You had a snowballing liquidation completely out of proportion to the (economic) fundamentals," says Gilbert de Botton, chairman of Global Asset Management in London. "Both the U.S. and Europe had been overexploited by investors on margin."

Back in New York, the report of extremely strong 6.3% real growth in the fourth quarter of last year, combined with Greenspan's well-publicized fears about incipient inflation, struck new fear into bondholders. The Clinton Administration didn't help matters. "The saber rattling over Japanese trade hurt a lot," says de Botton. "(U.S. Trade Representative) Mickey Kantor's allusions to the effect that the U.S. was not in favor of a strong dollar was an indirect source of forced selling (of U.S. bonds) by European investors." Fearing currency losses and declining bond values, foreign holders of U.S. bonds began to pull out.


Given all the leverage in the market, it shouldn't have been surprising that long rates moved up sharply when the Fed finally began boosting short-term rates. Indeed, some members of the Open Market Committee voiced fears at the February 4 meeting that even a small increase in the Federal Funds rate could rattle the bond market. Rattle it did. The initial rise in long rates brought forth a flood of margin calls. Rather than put up more money, which many of them didn't have anyway, speculators liquidated their holdings. With individuals bailing out of bond mutual funds as well, and little or no new money  coming into the market, bond prices had nowhere to go but down."

Edwards' rhetorical question, here: "Does that snippet not sound eerily reminiscent of current events?"

He also points out that while the Fed has so far hiked rates twice in the current tightening cycle, "these have become such isolated hikes that the market (Fed Fund futures strip) has lost confidence that the Fed will ever deliver their promises as represented by the Fed dots." With next week's rate hike, however, all this will change.

There is another key similarity between 2017 and 1994:

The top chart shows that back in 1994, just before the Feb 4 rate hike, 2y yields were trading some 100bp above Fed funds. That one 25bp rate hike prompted the 2y-Fed Funds spread to soar from 100bp to 250bp within the space of three months while the 10y-2y curve flattened rapidly, destroying carry-trade bets along the curve. The key similarity with 1994 is that currently US 2y yields at 1.35% still trade tightly to the current Fed Funds rate of 0.75% (see left-hand chart below). If the market really takes on board Janet Yellen?s much more aggressive rhetoric, then we could easily see 2y yields rise towards the 10y as we did in 1994. If that happens and the US 2y spread with German and Japan continues to soar (see righthand chart below), this will be like rocket fuel strengthening the US dollar

Finally, while Edwards is hardly a technician, he provides two charts to substantiate his claim that a historic bond rout may be imminent: while the right-hand chart shows that US yields have now broken out and are heading to 2.65% and then 2.85% in the short term, it is the left-hand chart that is most interesting, "showing that US 10y yields can rise all the way to 3¼% and beyond and the secular Ice Age bull market in government bonds would still be intact."

Edward's conculsion: "In 1994, it was excess leverage that broke the market, culminating in December 1994?s bankruptcy of Orange Country and also the Mexican Peso crisis in that same month (due to dollar strength). I?m going to look harder for my 1994 Global Strategy Weekly file, for despite remaining a secular bond bull, I think we are in for a rough ride - especially with equity markets at record highs."

Comment viewing options

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

"This is not a white country. It is ours." says Jorge Ramos.


BaBaBouy's picture

TRUMP Will Not Take It ...?

Granny Et Al out the Door???

FireBrander's picture

The world is starving for "return" any "jump" in rates will be followed by a FLOOD of money chasing "higher" rates; as the world still loves US Debt. So rates may rise, but it will be tempered by the flood of money chasing yield.

FireBrander's picture

I expect a rise in rates, followed by new (or at least a test of new) lows for ^TNX... at that point, maybe, it will be time to bet on rising rates.^TNX

gatorengineer's picture

Wow, think of all the money that could have been made if someone front ran this move / Sarc

Zorba's idea's picture

If? I'm calling Gross's cat...bill. Please advise how you constructed your short position.

TheRideNeverEnds's picture

Yea so bonds go from 177' basically straight down to 146' and NOW it's time to sell bonds.... to the shorts so they can cover.

BullyBearish's picture

Pin slowly withdrawing from bubble, bubble's integrity just beginning to falter, corners of pin holder's mouth starting to turn up in smile...

prime american's picture
prime american (not verified) BullyBearish Mar 9, 2017 12:41 PM

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do...

Takeaction2's picture
Takeaction2 (not verified) Mar 9, 2017 11:45 AM

SHTF everywhere........can't keep up with all of the news.  

Bastiat's picture

Before the year is over "disruptive" will not be a cool word.

toothpicker's picture

Disdisruptive will be the new black

Joe Cool's picture

The longest bull market in history (Bonds) won't implode unless they're going all the way....Like Hunter/Gatherer style outcomes for most....If your'e alive....Make no mistake....

hooligan2009's picture

as usual the author has missed the elephant in the room


I am Jobe's picture

Maybe we can offer 200 year bonds. Sheesh Schools need em to keep the indoctrination going. 

Dr. Engali's picture

Wrong. Fed hike is priced in the bawnd market Stay long 10s and 30s until the ten year hits 1% then I'll start unloading.

Oldwood's picture

At 64, is it too late for me to become a professional gambler too? Or should I just put my life's work into the hands of a "certified" professional? They would treat my money just like their own, wouldn't they?

Offthebeach's picture

They would treat their money as their money.   Your money would be treated as if some guy they never met, don't know, who is a stranger....gave them some money.  Now, a street bum you know is going to invest in a plastic pint of paint stripper vodka.  A broker?  Not sure.

gatorengineer's picture

Spot on Doc.... Its going to be a crowded profit  (shorts) taking trade in bonds....  For Stawks, hard to tell if that carry trade money will stay put, just rotate to stawks, or go home....

Dovda Wimar's picture

I'm confused. Should I be loading up on bonds or dumping them?

Dr. Engali's picture

Is the yield on the 10 year 1% yet?

Mikeyy's picture

Here's my bet Doc.  The 10 year won't hit 1% in the next 2 years.  Write down the date and put it into your calendar two years from now and come on back to ZH (assuming it hasn't imploded) and we'll see who was right.



Joe Cool's picture

You start seeing a panic like 1929, 2008 or 2001 and seeing red for months on Bloomberg, you know its over.   It isn't coming back for a decade....By then 90% of us will be dead....Don't kid yourself....This thing will continue until they decide to pull the plug and relocate to underground submarine bases with their buddies...

wisehiney's picture

I have wished on and with this fucker one hundred times minimum.

Never once has he gotten it right.

This time I hope he is wrong.

Oh shit.

LawsofPhysics's picture

LOL!  This is not 1994.  Not by a long shot.  What was the total debt and liabilities in 1994 again?

Go ahead Mr. Yellen, raise rates already!!!!!!!!!

tick tock motherfuckers!!!

A. Boaty's picture

Debt service in a rising interest rate environment? Uh-oh.

Zorba's idea's picture

Not good, not good one bip!

Consuelo's picture



Can you spare an extra AA for my clock...?

Hohum's picture

In the biz, he's called "Sunny Albert."

Hemlock007's picture

Everyone sees the correlation of deflation and the secular long term bull market.  This is not a bull market with the typical correlations we have seen in the past; this is a market manipulated for the benefit of the banks who are representatives of their Central Banks that do not want asset values falling below liabilities due to the nature of the fractional reserve and derivative leverage (numbers run from 10:1 to over 60:1).  Does anyone really believe we have no inflation?  The Central Banks have created asset bubbles in all markets levered against debt.  There is no payment stream to support the debt.  We have a scenario where bond yields will rise due to market expectations of default, and asset prices to fail because of the inability to service the debt supporting it. The media and the Central Banks are operating under an old set of rules.

LawsofPhysics's picture

So, since bankers and financiers are never held accountable, WWIII is coming.

It will come down to kill them BEFORE they kill you soon enough.

The laws of Nature and physics can be a real bitch like that and the scale of the moral hazard that has been unleashed by this human behavior is indeed unprecedented.



Uchtdorf's picture


Make Austerity Global Again!


That's the plan of the eilites. Besides, they think there are too many of us peons on the planet already. Therefore, we, the people who don't matter to them, will have to experience austerity, and if some of us (millions? billions?) have to die, oh well, it was still worth it to them, our Masters.

Joe Cool's picture

Doesn't anyone remember the Bernanke speech when he was first being groomed...Ya..."we have an invention called the printing press" you guys remember!   Why people say these things and make these predictions is beyond me...Shoulden't interest rates be like 8 or 10% by now under "normal" conditions....sheesh!

gatorengineer's picture

If you want to follow supply and demand, where is the demand other than from the giverment?.  Don't see any new shopping malls, or much commercial / industrial gowing up....  So I would say rates are actually high right now than if they werent fucked with.  

Remember we are in a depression after all.

Joe Cool's picture

It's planned demolition if they raise...No other way...

taketheredpill's picture



I was managing Bonds in 1994.  Difference between then and now (and any pre-2008 analysis and Now) is that Bonds sold off because the Fed surprised the market with a Rate Hike Cycle.

You can go back and look at the Dec 1993 FOMC minutes (I did) and you will see that Greenspan wasn't even thinking about raising rates.  30 Days later and they started a typical Rate Hike cycle.

But look at the patterns over the past 30 years.  Each cycle sees lower rates.  Lower Peak Fed Funds required to slow the economy and lower Trough fed Funds required to jump start the economy.  All because of higher and higher debt levels that rise in recessions and never get paid down during expansions.

Today, after $Triilions spent and ZERO rates (Fed finally hits the wall) we have total employment around back to where it was in 2007.  And the Long Bond RALLIED after the first hike in 2015! Thats what happens immediately after the LAST hike in a cycle. 

The Bond selloff we have now was driven by belief in the Trump miracle.  As that fades I expect another rally, until the big one when Equity markets crack.

At which point, GTFO of Bonds, $, ....



LawsofPhysics's picture

Yes, but the fact remains that our entire concept of eCONomics requires infinite and exponential growth...

Good luck with that.

taketheredpill's picture



Almost ALL mainstream Political parties are the same under the surface.  Their economic platform is based on 2% to 3% Real GDP.  Where they differ is mainly based on who gets how much of a slice of that ever expanding pie.  Plus smaller wedge issues like who can carry guns, have abortions drugs etc.


The Green parties seem to have realized that 2% to 3% Real GDP means that from today until 25 years from now we will consume as many resources as we have in all of history up until today.


Which seems problematic on a finite-sized planet.


See you all in the next life.



Oldwood's picture

So the fishing is best right before a storm?

I'll stick with chicken.

Mark of Zerro's picture

What is your view on March 15th?  So many are so sure that Yellen will hike that I'm taking the other side of that bet.


NuYawkFrankie's picture

Screw Albert Edwards... what does Gartman say?

taketheredpill's picture



Pre-2008 analysis is just nostalgia for a time when debt levels weren't choking off growth.

The Fed and the other CBs hit wall with ZIRP / NIRP.


There is no coming back to pre-2008 markets until the debt levels go down.  What will that be like?


“From time to time, I open a newspaper. Things seem to be proceeding at a dizzying rate. We are dancing not on the edge of a volcano, but on the wooden seat of a latrine, and it seems to me more than a touch rotten. Soon society will go plummeting down and drown in nineteen centuries of shit. There’ll be quite a lot of shouting. (1850)”

? Gustave Flaubert


Joe Cool's picture

And Bitcoin > Gold

Dragon HAwk's picture

There are some definite Advantages to being an Old Fucker.

was gonna say Phart, but that name is Taken.

Bam_Man's picture

UST 10-year yield has already DOUBLED since last July, bringing GDP growth down to <2%.

The Fed will be lucky to get in at most two more 25bps hikes before the US "economy" goes into full-blown recession.

The resulting bond rally will be EPIC, but probably be the last one EVER.

Pasadena Phil's picture

We'll know for sure that the epic rally is over when the Masters of the Universe televise the hanging of the last capitalist with the rope he sold them. Anybody who is buying bonds thinking they can time the end of the world and make a profit as well is a fool. It's one thing with Japan being the only country experimenting with negative interest rates. It's a completey different thing when the entire world has embraced that bizarro world.

As I like to say, nothing is inevitable. There is ALWAYS a way out. This doom and gloom fatalism is what is killing us.

NuYawkFrankie's picture

Bond Bloodbath?

No siree - not for me!

It might be boring, but fortunately I'm invested in never-default Sovereign Bonds with Long Term Capital ;)