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Snap AV: A soothsayer bids you beware…

Summary:
Yes, Ides of March references have been made many, many times. But when the Fed’s expected to raise rates on the same day the suspension of the US debt ceiling is lifted, and that day is March 15, what else is a blogger supposed to do?In any event, the soothsayer in question today is one who’s permanently pessimistic, so take with the usual grain of salt. Albert Edwards of Societe Generale warns about the market implications from an accelerated pace of Federal Reserve hikes:Accelerated Fed rate hikes will cause tremors in the Treasury bond markets, forcing rates up, most especially in the 2 year – just like 1994. But as yet another central bank-inspired global recession unfolds, I believe US 10y bond yields will ultimately converge with Japanese and European yields well below zero – in

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Yes, Ides of March references have been made many, many times. But when the Fed’s expected to raise rates on the same day the suspension of the US debt ceiling is lifted, and that day is March 15, what else is a blogger supposed to do?

In any event, the soothsayer in question today is one who’s permanently pessimistic, so take with the usual grain of salt. Albert Edwards of Societe Generale warns about the market implications from an accelerated pace of Federal Reserve hikes:

Accelerated Fed rate hikes will cause tremors in the Treasury bond markets, forcing rates up, most especially in the 2 year – just like 1994. But as yet another central bank-inspired global recession unfolds, I believe US 10y bond yields will ultimately converge with Japanese and European yields well below zero – in other words, buy 10y bonds on weakness!

He says the comparison to 1994 fits because it was widely expected that the Fed would raise rates back then as well. From SocGen:

Snap AV:  A soothsayer bids you beware…

The main worry is this: Market scepticism over the Fed’s projected pace of tightening kept two-year yields low through the first two hikes, so if traders decide the Fed is serious next week, there’ll be a selloff and yields will rise sharply:

Snap AV:  A soothsayer bids you beware…

Of course, there wasn’t quantitative easing in Europe and Japan in 1994. But that could lead to a wider spread between German and US yields, Edwards says:

If the market really takes on board Janet Yellen’s much more aggressive rhetoric, then we could easily see 2y yields rise towards the 10y as we did in 1994. If that happens and the US 2y spread with German and Japan continues to soar (see righthand chart below), this will be like rocket fuel strengthening the US dollar.

…despite remaining a secular bond bull, I think we are in for a rough ride – especially with equity markets at record highs.

Related links:
This is nuts. When’s the tantrum? — FT Alphaville

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Alexandra Scaggs
Alexandra Scaggs is a markets reporter for the Wall Street Journal in New York. She writes about the U.S. stock market and investment trends. She also covers the business of markets research, writing on the calls, personalities and moves of high-profile analysts and strategists. Ms. Scaggs graduated from Washington & Lee University with a degree in business journalism.