Remember in January, when all the buzz was about the possibility of a “1994 moment” – a repeat of the bloodbath in the bond market that year when the Federal Reserve unexpectedly tightened monetary policy?
Go figure – the sell-off the Treasury market has seen since early May is actually already worse than what went down 20 years ago, as ISI’s Ed Hyman points out in a note to clients this week.
“Looking ahead in 1994, bond yields surged another +100 [basis points] in the next 3.5 months,” writes Hyman. “Of course, the huge difference is that in 1994 fed funds were hiked +75bp during this period, and another +175bp by the end of the year.”
Needless to say, the situation in 2013 is drastically different from that in 1994.
“In sharp contrast, this year, there is no chance of a fed funds hike, and even with tapering, the Fed’s balance sheet will increase another +$450b, which could be viewed as equivalent to cutting the fed funds rate by roughly -50bp,” says Hyman.
The yield on the 10-year U.S. Treasury note has backed off a little from the high of 2.64% reached on Monday, and is now trading around 2.48%.