Bank of America strategist optimistic about commodities and gold: Policy intervention suppresses bond yields

FX News September 7 —— Bank of America strategist Michael Hartnett remains bullish on commodities and gold. He believes that various policy measures aimed at capping bond yields are having a tangible impact on the direction of financial markets.

Bank of America strategist Michael Hartnett remains bullish on commodities and gold. He believes that various policy measures aimed at capping bond yields are having a real impact on financial markets.

Hartnett and his team wrote in their research note: “Emergency policy responses are taking effect.”



When discussing interventions to support critical market levels (such as keeping gasoline at $4/gallon, holding USD/JPY at the 160 level, and suppressing US bond yields from breaking above 5%), the team noted that the yen has already shown strength.

Hartnett noted that central banks around the world tend to continue raising interest rates. Policymakers hope to maintain their policy credibility to ease upward pressure on bond yields. From an investor’s perspective, he recommends continuing to hold commodities and assets classified as currency depreciation hedges, of which gold is one.

He also reviewed the long-term rolling returns across asset classes: US equities delivered a 10-year rolling return of around 15%, commodities about 11%, while US Treasuries posted a 10-year rolling return of -2%.

Hartnett pointed out this is the worst decade for Treasuries in the past 100 years. He compared the current long-term return environment to historical periods: equities analogous to 1939, 1974, and 2009; commodities to 1933 and 2018.

Hartnett believes that investors are generally not overly concerned about the upcoming US midterm election risk at present, and are weighing the possibilities of several potential outcomes.

From the Senate’s competitive landscape, he judges that the probability of Democrats sweeping both the House and Senate is not high. He also observed that the current administration is increasingly relying on executive orders rather than going through the legislative process in Congress.

On the other hand, the report notes that Trump’s approval rating has dropped to the 35%-40% range. Historically, the average approval rating of a former president two months before the midterms is 53%. Prediction markets currently assign a 50% chance of Democrats sweeping both chambers.

Hartnett hypothesizes: If Democrats do achieve a landslide victory, the market will most likely enter risk-off mode—equities could fall by more than 10%, the US dollar would weaken, and bond yields would decline. Conversely, if Republicans unexpectedly win both chambers, risk appetite would rise further.

If Republicans take the Senate and Democrats retain the House, it would be moderately positive for risk assets—commonly referred to as the “Goldilocks effect (not too hot, not too cold, just right)” of a stalemate.



For the week ending September 2, fund flow data by asset class:

Money market funds: net inflow of $30 billion, the largest inflow among all asset categories tracked;

Bonds followed: net inflow of $18.3 billion;

Gold: net inflow of $3.2 billion;

Equities: only $2.8 billion of net inflows, the smallest weekly inflow for equities in 9 weeks.

Bond segments:

Investment-grade bonds: $9.2 billion inflow, with 22 consecutive weeks of net inflows;

US Treasury funds: $6.2 billion inflow, 10 consecutive weeks of positive inflows;

High-yield bonds: $1.5 billion inflow;

Bank loans: $600 million outflow, the first weekly outflow in 13 weeks.

Regional equity markets:

Japanese equities: $1.4 billion inflow, second consecutive week of net inflows;

European equities: $800 million inflow;

US domestic stocks: $5.9 billion outflow, second consecutive week of capital outflows;

Emerging market equities: $5.4 billion outflow;

Chinese equities: $5.3 billion outflow, fifth consecutive week of net outflows.

Sector theme funds:

Technology theme funds: $1.5 billion outflow, the largest weekly outflow since June;

Financial theme funds: $900 million outflow, fifth consecutive week of capital outflows.