'No panic anywhere' may be the problem, BofA strategists warn

Investing.com -- Bank of America strategists say complacency, not volatility, is the bigger risk right now, warning that markets are showing no signs of stress despite a spike in bond yields and commodities.

The 30-year Treasury yield has hit its highest level since June 2007 and commodities are surging, yet there’s "no panic anywhere" in markets, strategists led by Jared Woodard said in a note. They warned that this combination of blasé markets and bold policy intervention is "a recipe for volatility."

The team also flagged diesel, not the more headline-grabbing $100 oil price, as the real economic pressure point to watch, noting it has hit a record $6 a gallon and threatens shipping, trucking, agriculture, construction and mining.

On the positioning side, the strategists said "peak yield" trades are working ahead of expected central bank rate hikes meant to restore policy credibility, but noted that the rally in long-duration assets like biotech, regional banks and REITs has outpaced actual fund flows into those areas.

Transportation stocks were also highlighted as a signal worth tracking, noting the sector is testing its 200-day moving average. A break below that level, they said, would confirm that this summer’s "as good as it gets" moment for markets is turning into an autumn stagflation scare.

BofA also revisited the classic argument for holding bonds as a diversifier, saying that argument is fading. Bond and stock returns have turned positively correlated again this year, a reversal from the 2000-2019 stretch of globalization and low inflation when a 2-3% yield was treated as a bonus rather than compensation for risk. That shift, the strategists said, may mean allocators need higher yields before committing more capital to bonds.

On the AI front, the bank noted that despite $1.5 trillion in spending over three years, there’s little evidence yet of economy-wide productivity gains, with total factor productivity actually falling below trend, a measure strategists said has closely tracked consumer confidence for 50 years.

In recent flows, global equities drew $9.8 billion in the week through Sept. 9, but the three-week average has fallen to $7 billion, down sharply from an average of $52 billion in July. Bonds took in $17.5 billion, cash $12.9 billion, crypto $1.3 billion and gold $600 million.

U.S. equity funds logged their biggest three-week outflow at $14.2 billion, while China equities saw their first inflow in six weeks at $1.1 billion and materials extended an inflow streak to 10 straight weeks at $1.9 billion.

Within fixed income, investment-grade bonds notched a 23rd straight week of inflows at $5 billion and government/Treasury funds their 11th at $6.6 billion, while high-yield bonds saw outflows resume at $100 million.

By sector, tech led inflows at $2.2 billion, while consumer, healthcare and utilities funds each saw outflows.

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