Source: Zhitong Finance
Bank of America investment strategist Michael Hartnett said that returns on 30-year US Treasury bonds have been extremely poor in recent years, but that may change this year.
Bank of America investment strategist Michael Hartnett said that returns on 30-year US Treasury bonds have been extremely poor in recent years, but that may change this year. Hartnett emphasized in Bank of America's “Flow Show” report this week that since April 2020, the total return on 30-year US bonds has fallen by 45%, the biggest four-year decline since 1919. However, there are signs that US economic activity may be shrinking, which may prompt investors to seek protection in long-term US Treasury bonds. Hartnett said, “The 30-year US Treasury bonds (are) the best 'hedge' against weak nominal economic growth.”
Wall Street doesn't generally believe that the US economy will have a hard landing. In a Bank of America survey, only 11% of global fund managers think the possibility of a hard landing for the economy is too low. J.P. Morgan CEO Jamie Dimon warned this week that the market is too optimistic about the prospects for a soft landing in the US. Hartnett said that in the second half of 2024, the 3P factors of “Positioning, Policy, Profits (Positioning, Policy, Profits)” will reverse so-called “anything but bonds” transactions.
He said that the bull market in credit, stocks, and commodities, and the idea that “anything but bonds are fine” formed by strong growth in the US nominal gross domestic product (GDP) of 6% over the past four years has fueled the bear market. However, Hartnett pointed out that the economy is showing troubling signs, including retail sales stagnating and the unemployment rate reaching its highest level since January 2022. These developments pose a risk to the key “P” factor — profit. “The 30-year US Treasury bond is the best cyclical hedge against a hard landing,” he said.
He said that in terms of positions, “no one” is taking long 30-year US bonds because investors are worried about the US government debt situation, and pointed out that the US government has spent 6.3 trillion US dollars in the past 12 months. On the policy side, in the first year of a new presidential term, government spending usually “slows drastically,” while American voters will vote in November. He also said that on the margins, monetary policy will be relaxed and fiscal policy will be tightened over the next 12 months. These factors are beneficial to the bond market.
Hartnett reiterated his view that bonds are in the early stages of a long-term bear market, partly due to inflation and deficits. Hartnett said the bear market will only end when the public “votes to reduce fiscal excesses” through elections and Wall Street, failed bond auctions and downgraded debt ratings.
