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No One Remembers When Bonds Went Truly Bad

Job seekers speak with employers at the Veterans on Wall Street job fair in New York
Job seekers speak with employers at the Veterans on Wall Street job fair in New YorkPhotograph by Scott Eells/Bloomberg

All this consternation and kvetching—“headline risk,” traders call it—over a comeuppance in the bond market. Makes you wonder if investors and Wall Street, with its battalions of freshly hatched MBAs, have enough of a frame of reference for when a bond bear last truly happened: in 1994.

Mind you, that was also when this writer was in the throes of high school senioritis, as egged on by his 56k modem. But I’m also told it was an annus horribilis for Wall Street. For three years after the Gulf War recession, the Federal Reserve had kept rates low—“low” in those days was 3 percent—to help the financial system recover from its then-epic savings and loan crisis. When the Fed tightened, Wall Street’s bond-trading operations convulsed like they hadn’t since the 1920s. Treasuries fell a mere 3.3 percent in 1994. But U.S. bond expectations are built into everything but the water supply—which is a recipe for disaster when the Greenspan Fed, sensing inflationary threats, had to almost double its target funds rate to 5.50. All manner of fixed income sold off first, asking questions later.