Ever warm and fuzzy, Société Générale’s famed uber-bear Albert Edwards on Thursday warned that the Federal Reserve will sow the “seeds of destruction” in the bond market if it moves to hike interest rates next week as widely expected.

“Accelerated Fed rate hikes will cause tremors in the Treasury bond markets, forcing rates up, most especially in the two year — just like 1994,” said Edwards in a report.

1994 marked a historic bond market rout after a rate hike by the Fed that February sent long-term bonds into a tailspin and ultimately led to the bankruptcy of affluent Orange County, Calif., which had borrowed heavily to finance public projects and made risky bets.

Meanwhile, expectations for the U.S. central bank to tighten monetary policy at its March 14-15 meeting have been mounting on a stronger labor market and accelerated inflation. The Fed funds futures market is pricing in a 86% chance of a rate hike next week, according to CME’s FedWatch Tool.

“I remember the 1994 period as if it were yesterday,” Edwards wrote, observing how the market went into a “total convulsion” despite numerous signs and hints that a rate hike was imminent.

As the chart illustrates, the 25-basis-point interest-rate increase at the time propelled the spread between the two-year note yield and Fed funds to jump 150 basis points in a span of three months, even while the spread between the 10-year and two-year yields flattened.

Société Générale

“The key similarity with 1994 is that currently U.S. two-year yields at 1.35% still trade tightly to the current Fed funds rate of 0.75%. If the market really takes on board Janet Yellen’s much more aggressive rhetoric, then we could easily see two-year yields rise towards the 10-year as we did in 1994,” he said.

But a short-term spike in yields notwithstanding, the strategist believes the global economy faces an even bigger catastrophe when the “massive” credit bubble bursts, courtesy of the Fed.

“The 2007/08 global financial crisis will look like a soft landing when the Fed blows this sucker sky high,” he said. “All that is needed now is for the Fed to sprinkle life-giving rate hikes onto these, as yet dormant, seeds of destruction.”