In a recent note to clients, Bank of America Merrill Lynch’s Michael Hartnett warned that the risks of a bond market crash were high.
This comes in the wake of the Fed Chairman Ben Bernanke suggesting that the Fed could soon taper its quantitative easing program — the Fed’s effort to stimulate the economy by buying bonds to lower interest rates. In theory, the taper would put pressure on the bond markets because a major buyer (i.e. the Fed) scales back.
Hartnett notes that the other areas of the financial markets are getting slammed by taper fears and they are signaling worse times are ahead for bonds
Now the bad news. While the turn in housing should be welcomed by Main Street, the recent melt-up in stock prices in the US and Japan, in combination with surging home prices (annualizing gains of 16% in Q1), threatens to remove the liquidity “punch bowl”. And following the decline in a number of safe haven asset prices, we now see a host of “canaries in the bond-mine” indicating that markets are getting very nervous about QE tapering and the prospect of much higher bond yields. In recent weeks, mortgages, REITs, utility stocks as well as lumber prices have all tumbled (Chart).
Check out Hartnett’s ugly chart.
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