The “view” from where BofA’s Michael Hartnett is sitting goes something like this. “Still bearish risk assets on the price of money and higher-for-longer = hard landing.”

That’s verbatim from the latest installment of his popular weekly “Flow Show” series. In the past, Hartnett has described himself as a “patient bear,” but this week, he used the word “impatiently” in the context of the long wait for “capitulation selling,” a recession or a “credit event” with the potential to “trigger bullish policy easing.”

As noted here on several occasions over the past month or two, the march higher for US yields is likely sowing the seeds for its own reversal at this point. Hartnett echoed a version of that talking point. “Sometimes higher growth causes higher yields, and sometimes higher yields cause lower growth,” he remarked. (Ah, the circle of life. Or something.)

3% US 10s torpedoed small-caps, retail and biotech, 4% undercut banks and REITs and 5% is “now cracking high yield bonds, homebuilders, utilities and oil,” he went on. “Investors [are] now forced to sell leverage and deleveraging = much slower growth.” Eventually, anyway. The one-word question is “When?”

A clean resolution (not to be confused with a clean continuing resolution) would see the data roll over, clearing the way for a traditional late-cycle bull steepener+. But there are any number of more messy scenarios, one of which Hartnett has described in almost existential terms.

“Once recessionary bond and stock markets mutate into economic data, bonds rally big,” he wrote, adding that bonds “should be the best performing asset class of H1 2024.” I’d agree with that. After all, it couldn’t possibly get too much worse for Treasurys.

I don’t know why Hartnett uses 10/31/2022 for the “trough” date on the current bond bear market in the table on the left above. The current long-end drawdown dates from March of 2020 to today, basically, and the scope of that drawdown is near 50%. In any event, it doesn’t so much matter: The point is that this is the worst bond bear ever, and bonds are severely oversold, as shown in the figure on the right.

But the ultimate risk (this is the “existential” messy scenario mentioned above) is that bonds don’t rally in a recession. Regular readers are well acquainted: I’ve touched on this multiple times, including in the aptly titled “What If Bonds Don’t Rally In A Recession?”

The “nagging fear remains political,” Hartnett said. “In 2024 80% of global equity market cap, 60% of global GDP [and] 40% of the world’s population heads to the polls.” That, he went on, is “an incentive for more not less fiscal stimulus.” The “ultimate fear is a loss of political and policy credibility which engenders a ‘bond yields up, US dollar down’ crash trade.”

That’s the debasement trade. That’s what happened in the UK a year ago: Gilt yields up, but pound at record lows amid fiscal panic. If that were to happen to the US, it’d be disconcerting indeed.