BofA's Hartnett sees dollar slump, risk selloff if bond intervention fails

Investing.com -- Bank of America strategists say a fresh round of policy intervention to cap long-term Treasury yields is expected to succeed, but warn the consequences could be severe if it doesn’t.

Michael Hartnett and his team said Treasury Secretary Bessent’s efforts to keep 30-year yields below 5% represent the latest escalation in a series of "Bessent puts" aimed at stopping the "Anything But Bonds" threat to U.S. government and AI financing, following dollar swap lines with Asia and the Gulf and FX intervention on the yen.

The strategists said quantitative easing has been the genesis of the current bull market and the "too big to fail" conviction on Wall Street, and that extraordinary monetary stimulus over the past 20 years has produced extraordinary asset gains. Thus, ongoing efforts to fix fixed income should be expected to work.

But should that fail and Bessent can’t pull 30-year yields below 5%, they said, it would trigger a dollar slump and a shift toward short risk, short leverage in areas like AI hyperscalers and private credit, and short cyclicals such as financials heading into the midterms.

Commenting on the broader backdrop, Hartnett said the U.S. administration is currently "0-for-3" on its policy goals of 3% GDP growth, a 3% budget deficit as a share of GDP, and a 3 million barrel-per-day increase in oil production, with policy credibility, as measured by bonds and the dollar, continuing to erode as yields rise and the currency weakens.

The BofA Bull & Bear Indicator climbed to 9.5 from 9.3, deep in "sell" territory, on stronger global stock breadth and bullish positioning in the S&P 500 and gold futures. Hartnett noted positioning data now shows "extreme bull" readings, though stocks have only edged higher since the sell signal was triggered in late May.

On strategy, the team laid out a set of contrarian trades tied to prevailing consensus positioning. Against the crowded "Anything But Bonds" trade, they’re long REITs, biotech, regional banks and small caps. They’re also long Hong Kong property, betting that the multi-year slumps in both Chinese equities and real estate are ending.

Gold, meanwhile, remains their cleanest hedge against dollar debasement.

For AI, the call is short AI bonds, paired with a barbell into commodities and natural resources tied to the broader AI buildout.

The team flagged the midterms as a swing factor too, hedging via short financials. A Democratic Senate win — or a GOP loss of the Texas governorship — could spark a stock slump of more than 10%, they warned, along with declines in the dollar and bond yields into year-end.

Flows were broadly positive last week. Global stocks drew $40.1 billion, the largest in three weeks, while bonds added $21.4 billion. Gold and crypto funds also saw inflows, while $1.2 billion was redeemed from cash. U.S. Treasuries pulled in $7.4 billion, the most in six weeks, and investment-grade bonds extended their inflow streak to 20 straight weeks at $7.5 billion. Emerging market debt saw its largest inflow in 11 weeks at $3.3 billion.

On the outflow side, Korean equities saw their first redemptions in eight weeks at $800 million, semiconductor funds extended a third straight week of outflows to $6.3 billion cumulative, and financials saw their biggest outflow in 11 weeks at $2 billion.

European equity funds logged a third straight week of inflows at $200 million.

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