Forex Flash: Waxing nostalgic to 1994 with 10-year treasuries? – Goldman Sachs

FXstreet.com (Barcelona) - According to the Economics Research Team at Goldman Sachs, “Weaker data have pushed US 10-year yields below 2% again, but we expect a gradual rise through the year and there is a risk that they may rise faster.” After years of falling yields and flat policy rates, a natural concern is whether an increase in rates would be painful for global markets and the economy. 1994 is the poster-child for such concerns, a year in which the Fed surprised markets by hiking rates, and a parallel shift higher in the curve caused severe stresses in places with leveraged duration exposure.

The distress caused by the 1994 bond market sell-off was a function of the size of the policy and asset market shifts, the surprise of that shift relative to expectations and exposure of portfolios to the affected assets, where the portfolio exposure is a function of position size, duration and leverage.