The '1994 Moment' Is Keeping More And More Bond Traders Awake At Night

The pickup in the economic data in the U.S. lately and the Federal Reserve's recent musings on tightening monetary policy have many wondering if bond markets are set to repeat a "1994 scenario."

In 1994, the economy was emerging from a big recession, and Treasury yields began to rise slightly from their 1993 lows as the growth outlook improved – though no other signs of inflation had yet emerged.

Taking their cue from rising yields, Alan Greenspan and the Fed surprised markets by beginning to tighten monetary policy, and Treasuries plunged as interest rates screamed higher throughout the year.

Given the recent rise in Treasury yields after a sustained period at low levels – the same impetus for the Fed's tightening in 1994 – many wonder if the stage is set for another bloodbath in fixed income markets.

One experienced bond trader who got his start in 1993 sent us the chart above, annotated with an arrow and the comment, "We could be here."