The 1994 bond shock – and seared in the memories of bond-holders – ricocheted through global markets. It bankrupted Orange Country, California, which was caught flat-footed with large bond positions. It set off the Tequila Crisis in Mexico as the cost of rolling over `tesobonos’ linked to the US dollar suddenly jumped.
Bank of America said the “Great Rotation” under way from bonds into equities closely tracks the pattern of 1994, with bank stocks leading the way.
Wall Street’s veteran technical analyst Louise Yamada said a whole generation of small investors has been lured into bonds since the stock market crash in 2008 in the belief that is a safe strore [sic] of wealth, seemingly unaware of the risk once inflation returns. “I am quite concerned. It’s distrubing [sic] to see a lot of retirees who got stuck at the top of the stock market, now got stuck at the top of the bond market,” she said.
She says the world may be at a turning point comparable to 1946 when deflation was defeated and the last bear market in bonds began, though it is likely to be a slow process. She advises people to switch into shorter term maturities, citing a “bottoming process in rates rates, which means a topping process in price”.
The great question is whether the world economy really is at the start of a fresh cycle of growth, or whether the roaring asset rally of the last few months is another false dawn driven by central bank liquidity that is failing to gain economic traction.
Full article: Bank of America issues `bond crash’ alert on Fed tightening fears (The Telegraph)