Low Bond Yields Susceptible to 1994-Style ‘Reversal’

Record-low bond yields in the global market are “susceptible to a sudden reversal,” potentially putting U.K. bank earnings at risk, Bank of England said.

Concern the sovereign-debt crisis may spread, undermining demand for government bonds, as well as the risk of accelerating inflation may cause an “abrupt snap back” in bond yields, the U.K. central bank said in its Financial Stability Report. The bank said such a scenario could destabilize the market as happened in 1994, referring to a bond sell-off that occurred when the prospect of rising inflation led the Federal Reserve to begin tightening monetary policy. The Fed funds rate nearly doubled to 5.50 percent that year.