Investors should sell U.S Treasurys and buy bank stocks because bonds
may be headed for a “crash,” according to Bank of America Corp.
“It’s hard to believe that the greatest bond bull market in history
will end without some bloodshed,” Michael Hartnett, the bank’s chief
investment strategist, recently wrote in a client note.
“Risks of a bond crash are high.”
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Markets are getting nervous about the possibility the Federal Reserve
will taper its debt-buying program, according to Hartnett, who is based
in New York.
Fed Chairman Ben Bernanke said the central bank could curtail its $85
billion in monthly Treasury and mortgage bond purchases if policy makers
are confident that improvements in economic growth are sustainable.
U.S. debt has dropped 1.8 percent in May, the steepest monthly loss
since December 2009, according to the bank’s indexes. Benchmark 10-year
yields declined from 15.8 percent in September 1981 to a record low of
1.38 percent in July last year. The move resulted in a gain of more than
1,000 percent for the bank’s Treasurys index.
“Major breakouts in equity markets tend to coincide with major
inflection points in bond yields,” Hartnett wrote. The Standard &
Poor’s 500 Index has climbed 16 percent this year, and it set an
all-time high of 1,687.18 on May 22.
Bank of America’s bond strategists predict the 10-year yield will
rise to 2.25 percent by year-end, according to the report. The company’s
economists forecast the Fed will begin paring its bond purchases in
April, it said.
The bank is bullish on U.S, European and Japanese banks, along with
equities from emerging markets such as Brazil, China, India, Turkey and
Russia, according to the report. It is negative on emerging market
bonds.
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