By Jamie McGeever
LONDON, Oct 9 (Reuters) - It's a rare year when total returns on U.S. Treasuries are negative, but when they are, the ripple effect on global markets is potent.
Stocks, credit, high yield and emerging markets, in particular, suffer as investors bail out of the world's safest and most liquid asset, pushing up the cost of money, squeezing liquidity and tightening financial conditions.
That's the running assumption, and it's setting the narrative for financial markets right now as the U.S. bond selloff gathers pace and Treasuries close in on what will be only their fifth year of negative returns since the early 1970s.
Trouble is, that's not how it necessarily pans out. The previous four years of negative Treasuries returns - 1994, 1999, 2009 and 2013 - show a widely mixed response across global markets.
The following table shows how a clutch of major financial market indices and assets performed in these previous four years and how they are faring so far this year.
In each of these years the 10-year U.S. Treasury yield rose at least 80 basis points, with the 204 bps spike in 1994 still the largest annual rise on record. So far this year, the yield is up 84 bps and many observers believe it is heading higher.
Much depends on that indefinable notion of whether bond prices are falling for "good" reasons - a booming economy, meaning an orderly selloff - or "bad" reasons - fears that the Fed is behind the curve and will be forced to jack up rates aggressively, resulting in a disorderly selloff.
This year has seen a bit of both. U.S. growth has been stellar and the Fed has stuck to its steady path of raising rates. But fears that the Fed will have to do much more, thereby choking growth and precipitating the long-awaited downturn, have intensified in recent weeks.
The 10-year yield fluctuated in a 2.75-3.10 pct range for most of the year, almost always below 3.00 pct. But in mid-September it broke convincingly above 3.00 pct and this week surged to a seven-year high of 3.26 pct.
The fear is what has been a relatively orderly selloff in the bond market up to now could turn into something more resembling a rout. The 10.5 basis points rise on Wednesday, Oct. 3 was the biggest one-day rise since the day after the U.S. presidential election nearly two years ago.
Analysts at Goldman Sachs draw a distinction between the "nowhere to hide" bond bear markets during the two World Wars and the periods of stagflation in the 1970s and 1980s, and the bouts of bond market weakness since the 1990s, excluding 1994.
The "nowhere to hide" bear markets saw sharp declines across many asset classes as markets repriced growth and inflation risks. But most downturns since the 1990s have been against a backdrop of anchored inflation and inflation expectations, meaning they are shorter and more shallow in both nominal and real terms.