Bank of America’s chief investment strategist Michael Hartnett warned that Treasury Secretary Bessent’s push to keep 30-year U.S. bond yields below 5% could fail, with broader market consequences if intervention proves ineffective.
Hartnett described Bessent’s approach as part of a series of policy measures—dubbed "Bessent puts"—aimed at preventing a bond market rout that could destabilize U.S. government financing and AI-related debt markets. These measures follow earlier actions, including dollar swap lines with Asia and the Gulf, and foreign exchange intervention in the yen. A failure to cap yields could lead to a dollar slump, increased risk aversion, and short positions in cyclical sectors such as financials ahead of U.S. midterm elections.
The strategist also highlighted the administration’s policy track record, noting it has yet to achieve three key objectives: 3% GDP growth, a 3% budget deficit as a share of GDP, and a 3 million barrel-per-day increase in oil production. Hartnett suggested that a Democratic Senate victory or a Republican loss in the Texas gubernatorial race could trigger a stock market decline exceeding 10%, alongside declines in the dollar and bond yields by year-end.
Positioning data reflects elevated risk appetite, with Bank of America’s Bull & Bear Indicator rising from 9.3 to 9.5—deep in "sell" territory—driven by strong global equity breadth and bullish bets on the S&P 500 and gold futures. Despite the contrarian signal, stocks have only inched higher since the sell signal was issued in late May.
Hartnett recommended contrarian trades, including long positions in REITs, biotech, regional banks, and small caps, as well as a bet on Hong Kong property, citing signs that Chinese equities and real estate may have bottomed. Gold was cited as the cleanest hedge against dollar debasement, while shorting financials served as a hedge against midterm risks. For AI-related strategies, Hartnett advised shorting AI bonds while adopting a barbell approach into commodities and natural resources tied to the broader AI infrastructure buildout.
Last week’s fund flows showed global equities attracting $40.1 billion, the largest inflow in three weeks, while bonds added $21.4 billion, with U.S. Treasuries seeing $7.4 billion in inflows—the highest in six weeks. Investment-grade bonds extended their inflow streak to 20 straight weeks at $7.5 billion, and emerging market debt recorded its largest inflow in 11 weeks at $3.3 billion. Cash redemptions totaled $1.2 billion, while Korean equities saw their first outflows in eight weeks at $800 million. Semiconductor funds extended a three-week outflow streak to $6.3 billion cumulatively, and financials experienced their largest outflow in 11 weeks at $2 billion. European equity funds logged a third straight week of inflows at $200 million.
