Last week’s interest rate hike worried Bank of America analysts about a imaginable stock market collapse.
On a note Friday, the bank highlighted the historic spike in mortgage-backed bond yields and the existing environment until 1987, when a continued increase in MBS yields preceded a stock market drop of more than 20%.
In 1987, a surprise in interest rates in April followed additional rate increases that eventually led to the collapse of the October inventory market, BofA said.
“The question is whether the Fed needs to respond now with more money and MBS purchases or expect an even greater threat relief opportunity before doing so,” BofA said.
A Fed wonder would likely provoke bond vigils and cause interest rates to decline, which would help a really extensive stock market collapse as in October 1987.
“Unless the Fed retaliates very soon with more purchases of money/MBS, there is likely to be a destination,” BofA warned.