The Fed has 'lost control', and the historic spike in bond yields points to a looming stock-market crash, Bank of America says

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The Fed has 'lost control', and the historic spike in bond yields points to a looming stock-market crash, Bank of America says
Getty Images / Xinhua News Agency
  • The recent spike in interest rates has Bank of America warning of a potential stock market crash, according to a Friday note.
  • The bank sees 1987 as a potential roadmap for 2021, in which a continued spike in yields helped spark weakness in the market.
  • "Unless the Fed fights back very soon with more treasury/MBS purchases, a similar fate likely lies ahead," BofA warned.
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Last week's spike in interest rates has Bank of America analysts on edge about a potential stock market crash.

In a note on Friday, the bank highlighted the historic yield spike in mortgage-backed securities and compared the current environment to 1987, when a continued jump in MBS yields preceded a stock market crash of more than 20%.

In 1987, an interest rate shock in April was followed by further rate increases that ultimately led to the October stock market crash, BofA said.

But this time around, the Fed may have "lost control," as its options to combat rising yields dissipate due to rapidly improving COVID-19 cases and a swift economic reopening.

"The question is whether the Fed wants to respond now with more treasury and MBS purchases or wait for an even larger risk-off event before doing so," BofA explained.

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A surprise from the Fed would likely temper bond vigilantes and lead to a decline in interest rates, helping stave off a substantial stock market crash like in October 1987.

"Unless Fed fights back very soon with more treasury/MBS purchases, a similar fate likely lies ahead," BofA warned.

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