1994 All Over Again?

With 10-yr Treasury rates once again rising to 2% and the global economy showing signs of life, bond investors have begun looking back for guidance from similar time periods where these factors came together and how the bond market fared in such a climate. In the modern financial market era (post WW2), 1994 sticks out as a bond market similar to today's. At the beginning of 1994, rates where at then historically low levels (3% fed funds rate and 6.2% 30-year Treasury) and the economy had been growing steadily for 10 straight quarters. One very popular hedge fund strategy in 1994 was a leveraged carry trade, where investors borrowed money short-term and bought long maturity bonds to cash in on the steepness of the yield curve. In 1993, that helped generate 50%+ returns; in 1994, several hedge funds lost more than 25%. To generate those losses, the 30-year treasury moved just 1.45%, from 6.20% to 7.75%, as inflation, growth, and, most importantly, non-farm payrolls surprised to the upside. Though there are notable similarities between 1994 and 2013, there are substantial differences. GDP, inflation, and the labor market all began 1994 in a much stronger position than we find ourselves in today. Also, today the consumer is still deleveraging after a deep recession and the Fed has expanded its balance sheet in an unprecedented fashion to encourage economic growth. We will be publishing a Minute in the Market later this week to take a more in-depth look at this comparison and update our investors on how we are positioned to withstand and take advantage of such an increase in interest rates.