WSJ.com is available in the following editions and languages:
Thank you for registering.
We sent an email to:
Please click on the link inside the email to complete your registration
Please register to gain free access to WSJ tools.
An account already exists for the email address entered.
Forgot your username or password?
This service is temporary unavailable due to system maintenance. Please try again later.
The username entered is already associated with another account. Please enter a different username
The email address you have entered is already in use.Please re-enter the email address.
Send me information about more WSJ features
Create a profile for me in the Journal Community
Why Register?
Privacy Policy | Terms & Conditions
As a registered user of The Wall Street Journal Online, you will be able to:
Setup and manage your portfolio
Personalize your own news page
Receive and manage newsletters
Receive and manage newsletters
Remember me Forgot your password?
Digg
For most, 1994 wasn’t a particularly notable year. There was no presidential election, no major geopolitical developments, no stock market crash, and no summer Olympics.
And yet it’s a year that ought to be etched on investors’ minds. Because, in 1994, the bond market suffered a very sharp and sudden selloff that started in the U.S. and Japan and then spread more or less across all developed markets. In fact, the move was strangely reminiscent of what’s happening now.
Between January and September 1994, the U.S. 30-year long bond’s yield jumped more than 150 basis points to 7.75%. The proximate trigger was a Federal Reserve rate hike as it started to tighten policy following recovery from the 1991 recession. But while changes in inflation and official interest rate expectations might have had a little to do with the U.S. bond market’s performance, they weren’t really behind the generalized bond market selloff, according to a Bank for International Settlements post mortem the following year.
Instead, it seemed that the bond market’s own internal dynamics had more to do with the widespread selling than any macroeconomic factors — volatilities across major markets jumped between 10 and 20 percentage points, whatever the local factors.
Why should we bother remembering 1994? Well, because sovereign debt has been selling off across developed markets. The yield on the 30-year U.S. Treasury long bond jumped more than 100 basis points since late summer before edging back somewhat. In relative terms, the selloff of the past four months is even bigger than 1994’s — a 30% rise in yields against a 25% rise. And there have been significant correlated moves elsewhere. Gilts, bunds and even Japanese government bonds have all suffered a jump in yields.
Once again, the proximate trigger appears to have been U.S.-driven. The threat of another round of quantitative easing since the summer raised expectations that the U.S. economy is poised to recover, leading to a (relatively speaking) normalization of interest rates.
Does it matter? After all, there were no major economic consequences of the 1994 sell off. The U.S. economy did not relapse. Indeed, it swung into the large Clinton-era boom that culminated with the tech and telecom bubble. If anything, it might have made the Federal Reserve reluctant to be too aggressive with tightening monetary policy, helping to foster the moral hazard that encouraged the tech bubble.
Yet it could if yields continue to push up, sending 10-year Treasuries to, say, within sight of 5% from the current 3.4%. In 1994, the economy was relatively well positioned to weather a yield spike. Debt levels were considerably lower than now and most of the Savings & Loan crisis had been resolved. You’d be hard put to claim the banking sector’s balance sheet is now back to health. And households are enormously over-indebted, not to mention the fact that the U.S. government seems to have lost control of its own finances.
A repeat of 1994 could prove the disaster now that it wasn’t then.
Yahoo! Buzz
MySpace
Digg
del.icio.us
NewsVine
StumbleUpon
Mixx
Error message
The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
Read Full Article »