A 1994 Redux?

A prevailing theme that the pundits are trying to furiously push onto hapless lemmings in hope of forcing them out of bonds and into stocks, is that the current capital market is somehow comparable to that of 1994 and that the Fed rate hike of 1994 is imminent in our day and age too. Aside from the fact that the economy, or the market, is nothing like 1994, the subliminal suggestion is that the Fed may just pull a Greenspan, and proceed to hike rates one clear day, in the process sending the long-end soaring, so please dear lemmings: rotate greatly. So if one were to ignore the fact that for the Fed to hike it would imply that the $14 trillion in global central bank support would immediately start being withdrawn, and thus sending the S&P lower by over 1000 points, how does this particular fable work? Here is how Bank of America spins it.

A small step for the Fed; a giant leap for the bond market: The economic recovery in the early 1990s was similar to today’s recovery. Growth rebounded slowly from the 1991 recession, so the Fed continued to cut rates and then went on hold with a 3% funds rate from October 1992 to January 1994. This caused a steady rally in the bond market, with monthly average 10-year yields bottoming at just 5.3% in October 1993. This was an extraordinarily low yield; coming just 10 years after yields had peaked at 13.4%.


Sure enough: a tidy little package. There is one problem: hiking rates means that the Central Banks admit their balance sheets are too big. Which means one simple thing: the $14 trillion orange bar will be "discounted" as going to zero asap. What happens next Bank of America can certainly tell us, but something tells us they won't.