The Bond Crash of 2022 is ‘Doozy’ – BofA

The Bond Crash of 2022 is ‘Doozy’ – BofA

By Staff

Michael Hartnett, strategist at Bank of America Securities, calls the current bond crash the “Third Great Bond Market,” with the first being 1899-1920, and the second being 1946-1981. He said it’s “doozy” so far. The strategist said global government bond losses for 2022 are on track to “the worst since 1949 (Marshall Plan), 1931 (Credit Anstalt), 1920 (Treaty of Versailles).

He said bond crashes threaten credit events and liquidate the world’s busiest trade: long US tech and long private equity. He points out that true surrender is when “investors sell what they love and own”.

The strategist highlights that since August 1st US yields have been +110bps, UK yields +123bps (fastest rise since 94), German bond yields +87bps (fastest since 90), And the French OAT returns +83 basis points (the fastest since 94). The higher yields were driven by inflation (German PPI +46%), central banks (~300 interest rate increases in the last 12 months), but also fiscal deficits due to the new era of government bailouts in every crisis + deteriorating geopolitics = more of military spending (war inflationary).

Looking at weekly inflows, the strategist noted cash flow to $30.3 billion, outflows from gold of $0.4 billion, bonds of $6.9 billion, and equities of $7.8 billion.

The company’s Bull & Bear Index has returned to the maximum downtrend at 0.0.

Hartnett doesn’t see the dips in stocks yet given the inflation/rate/recession shocks aren’t over yet and bond collapses in recent weeks mean hikes in credit spreads. It “nibbles” at 3600, “bites” at 3300, and “knocks” at 3000.

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The strategist said the bear risk is a 1987 type case, while the bullish risk is a 1975 type case where small cap has outperformed significantly.

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