Fed rate hike may steady bond market, BofA strategist says
Bank of America’s Michael Hartnett says higher rates may be needed as 30-year real Treasury yields hit a crisis-era high.
By Sal Moretti · Money Reporter
3 min read
A Fed rate hike bond market rescue is back on Wall Street’s radar, with Bank of America strategist Michael Hartnett arguing that Federal Reserve Chair Kevin Warsh may need to raise rates to calm pressure at the long end of the Treasury curve.
In his weekly Flow Show note, Hartnett pointed to a rough setup for bonds: the real yield on 30-year U.S. Treasury debt has reached 3%, the highest level since November 2008, during the global financial crisis. MarketWatch reported that investors are assigning a 38% chance to a Fed rate increase next week and have fully priced one in by the Sept. 16 meeting.
The problem, as Hartnett frames it, is political and market-sensitive. He described the administration as friendly to equities, raising the question of whether policymakers will accept a rate move that could weigh on stocks before November’s midterm elections.
Why would a Fed rate hike help the bond market?
A rate increase can signal that the Fed is serious about inflation, which may reassure investors demanding higher yields to hold long-term debt. Hartnett also said higher U.S. rates could widen the yield gap with other bond markets, pulling money into Treasurys.
Financial conditions are already tightening, according to Hartnett. He said there have been 23 central-bank rate increases this year, and Bank of America expects another 18 before year-end.
The backdrop is not exactly soothing. Hartnett cited consumer-price inflation running at 3% to 4%, a labor market that is not yet showing signs of disruption from artificial intelligence, and investor positioning that he characterized as a broad preference for assets other than bonds.
Warsh has also moved away from Fed forward guidance, according to Reuters reporting cited by MarketWatch. That means investors have less of the old playbook to lean on as they try to guess the central bank’s next move.
Hartnett warned that a market pattern could turn nastier. Recently, rising bond yields have gone along with gains in bank stocks. He said that could shift into a more damaging mix of higher yields and falling bank shares, potentially setting off selling across riskier assets.
His suggested shield is the U.S. dollar. Hartnett argues that if higher rates make U.S. debt more attractive relative to other markets, money could flow into Treasurys and support the currency.
Bank of America’s team, including Jessica Guo, Anya Shelekhin and Myung-Jee Jung, is favoring defensive stocks, dividend trades and longer-duration assets such as longer-term bonds. The team is less keen on banks, brokers, technology and industrials.
Hartnett also flagged weakness in semiconductor shares, saying the group is down by a fifth from its June peak and is acting as an early signal for the AI-linked industrial cycle. He linked that pressure to the Magnificent 7 technology stocks struggling around their 200-day moving average.
Beyond rates, Hartnett drew attention to supply strains in oil and the steady supply of U.S. bonds and stocks. He said 64 million barrels of crude moved daily through the Hormuz and Bab el-Mandeb chokepoints before hostilities began, while the U.S. deficit stands at $2 trillion and the annual interest bill is $1 trillion.
For equities, Hartnett said AI capital spending is pushing large parts of S&P 500 cash flow into negative territory, which he expects to mean fewer buybacks. That is one reason he sees gold and bitcoin stabilizing lately and expects both to beat Wall Street over the rest of the decade.
This story draws on original reporting from MarketWatch.