Michael Hartnett and the investment strategy team at Bank of America Merrill Lynch recently warned that the “risks of a bond crash are high.“
“While our core asset allocation remains bullish on equities and bearish on bonds, the risks of a risk-negative bond crash a la 1987, 1994 and 1998 remain high enough to warrant short-term caution,” wrote Hartnett today reiterating his warning.
The team believes everyone should keep an eye out for the warning signals which preceded the last three crashes. Here’s BAML verbatim:
- 1994: The lead indicators were a pickup in US bank lending and small business hiring intentions, which led to a Q1 payroll shock and caused the Fed to quickly tighten policy.
- 1987: The October crash was preceded by a dangerous combination of rising stocks, bond yields and gold prices, as well as global policy discord, as the Germans and Americans argued about monetary and exchange rate policy.
- 1998: Amidst the ongoing Asian Financial Crisis and Japanese bank bailouts, confusion on how much the Fiscal Investment and Loan Program of the government would buy government bonds caused yields to jump by more than 100 basis points in less than three months, which led to a 13% equity correction.
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