Bank of America thinks the next big move in bond yields is down, not up. That single line matters more than any recent data point.
If Treasuries head towards 4% rather than 6%, as Michael Hartnett and his team suggest, the beneficiaries will be the neglected corners of the equity market: small caps, real estate and biotech.
Gold and crypto stay in favour, while the dollar looks set to weaken further.
The case is straightforward. Governments cannot afford to incur spiralling debt costs higher.
Ten-year gilt yields at 5.6% are the highest since 1998, French bonds at 4.4% are the highest since 2009, Japan’s at 3.2% the highest since 1999, and the US has tested 5%.
That should have triggered stress in credit markets and bank shares. Instead, spreads are contained and financials are steady. Hartnett argues policymakers will reach for “price-keeping operations”, quantitative easing, yield curve control, and Operation Twist, to stop the pain.
The Fed is under pressure to cut rates and, unlike in 2022, the data now give cover to do so.
Construction spending is down despite the artificial intelligence data centre boom, house prices have fallen for four consecutive months, job openings are declining and graduate unemployment has doubled in 18 months.
The bond market smells recessionary conditions in rate-sensitive sectors, which is why Bank of America sees US yields falling back.
Flows tell the same story. In the past week, investors put $51.8 billion into cash, $22.2 billion into bonds, $17.6 billion into equities and $6.5 billion into gold.
Over the past five weeks, $200 billion has gone into money market funds, the biggest surge since January.
Bonds have seen 19 consecutive weeks of inflows, with 77% into higher-yielding credit and emerging market debt. Gold has had its strongest weekly inflow since April.
The political backdrop reinforces the call. Bank of America revives the Nixon playbook: in the early 1970s, the White House pressured the Fed, debased the dollar and imposed price controls ahead of an election.
Markets boomed, led by the Nifty Fifty growth stocks, until inflation broke loose in 1973 and shares collapsed by almost half. The echo today is the dominance of the Magnificent Seven, which now account for more than a third of wealthy clients’ top holdings.
President Trump’s interventions underline the theme. Since returning to office he has ordered drug prices down, declared a national housing emergency and vowed to halve electricity costs.
Energy, healthcare and utilities are the targets, while technology, semiconductors and defence are the winners. Bank of America calls it the shift from the invisible hand to the visible fist.
Private clients are playing along. Of the $4.1 trillion they oversee, 64% remains in equities, with allocations to the Magnificent Seven back at last year’s highs.
At the margin, they are rotating from Treasury bills into longer-dated notes, buying emerging market debt and high yield credit, and selling healthcare, energy and staples.
For UK investors, the tension is acute. Britain’s bond yields are at the sharp end of the global sell-off, reflecting both fiscal doubts and Prime Minister Keir Starmer’s dwindling approval ratings.
But the lesson from Washington is that politics trumps markets: policymakers will not allow borrowing costs to stay at levels that threaten solvency.
So the investment story is this: yields are peaking, gold is in demand, and leadership in equities could broaden beyond the tech titans.
The 1970s remind us that booms driven by political manipulation rarely end well. But before the bust comes, there is still money to be made in the parts of the market that nobody wants to own today.