Beaten-down bonds will make a comeback in 2024 as high interest rates and tighter financial conditions increase the risk of the economy making a hard landing, according to Bank of America Corp.’s Michael Hartnett.
(Bloomberg) — Beaten-down bonds will make a comeback in 2024 as high interest rates and tighter financial conditions increase the risk of the economy making a hard landing, according to Bank of America Corp.’s Michael Hartnett.
Once the recession being priced by bond and stock markets “mutates into economic data, bonds rally big and bonds should be the best performing asset class in the first half of 2024,” Hartnett wrote in a note.
Hartnett, who has been pessimistic on risk assets throughout this year, remains bearish for now amid the likelihood of an economic hard landing from higher interest rates. His team is “impatiently waiting for capitulation selling, and a recession or credit event to trigger bullish policy easing.” he said.
That will “trigger a big rally in assets that have already discounted recession,” he added.
Bonds have been roiled since the Federal Reserve implied interest rates will have to remain at higher levels for longer than expected. And, Friday’s nonfarm payrolls data showing a surge in hiring bolstered expectations the Fed will raise interest rates again this year. Yields on 10-year Treasuries neared 4.9% while the 30-year bond rose above 5% — both at the highest since 2007.
Read more: The 5% Bond Market Means Pain Is Heading Everyone’s Way
But the bond slump hasn’t deterred investors from buying. In the week through October 4, Treasury funds took in $4.6 billion, their the 34th straight week of inflows. “No capitulation here,” Hartnett wrote, citing data from EPFR Global. Equity funds also had $3.3 billion of inflows.
However, in a sign of mounting caution, investors pumped $70.8 billion into cash, the biggest inflow since July.
For stocks, Hartnett advises selling the S&P 500 at the upper half of the 3,600 to 4,200 range, and is “convinced the bear market has unfinished business.” The S&P 500 closed at 4,258 on Thursday.
(Adds US jobs data and related market moves)
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