Have you put on your flatteners?

That’s a question some folks are asking these days as the odds of a March hike and -dare I speculate – an actual rate hike cycle increase.

Now it’s exceedingly possible that you might not be old enough to remember what policy normalization looks like…

…but on the off chance you do, you might be wondering what happens to this absurd equity rally in the event financial conditions tighten.

As I’ve discussed at length here of late, one of the reasons the Fed pretty much has to move now or forever hold its peace is that the juxtaposition between financial conditions today and financial conditions following “liftoff” is so stark. This time: stocks at records, dollar reasonably well behaved and Trump/Navarro trying to jawbone it lower. Last time: stocks plunge in January on China/deflation jitters and dollar firm enough to necessitate the Shanghai accord.

So the logical question is whether tighter financial conditions facilitated by the Fed will derail the risk rally. This is a kind of corollary to the idea that at this juncture, a hike is seen as a positive development as it reinforces the reflation narrative.

Remember when rate rises were bad?

— Tracy Alloway (@tracyalloway) March 7, 2017

Well BofAML is out on Wednesday with some interesting commentary on how equities usually perform when the curve bear flattens. Indeed, this is the subject of the bank’s “chart of the day.” To wit…

Via BofAML

Market participants often associate a bear flattening of the Treasury curve with a tightening in financial conditions. This view stems from the fact that, historically, as the Fed raises the Fed Funds rate in previous hiking cycles, 5s-30s curve have flattened dramatically to at least zero, and sometimes well below zero.

In our analysis, we conclude (1) a bear flattening of the Treasury curve, in most cases, does not lead to a tightening in financial conditions. Looking at the data since 2000, risk assets tend to outperform during the weeks when curve bear flattened significantly (see Chart of the day: bear flattening of the UST curve is not bad news for risk assets). Plus, most equity corrections happen early in the cycle and fewer happen in the middle of the cycle. (2) In the bear flattening periods following Fed hikes historically, the US dollar and FX carry gained the most, while so-called “safe-haven” FX and gold have underperformed.

It is our view that a bear flattening is underway as the Fed moves to a more “normal” hiking cycle, among other reasons. As mentioned above, history tells us this does not lead to financial condition tightening in the near term and our bear flattening view does not contradict a continued risk-on move in markets (which is our equity analysts’ call).