Bonds. Nobody wants them.

I shouldn’t say nobody. Maybe Lacy Hunt wants them. Or Albert Edwards. Nobody else, though.

Why not? What’s wrong with bonds? Well, they’re in the early stages of a secular bear market. Or so insists BofA’s Michael Hartnett, who spent the latest installment of his popular weekly “Flow Show” series repeating himself, as he’s wont to do.

That’s not necessarily a criticism. I spend all week repeating myself. If you can do it effectively, and people enjoy it, then hats off. And Hartnett’s pretty effective.

“Some” investors are long the US front-end in anticipation of Fed cuts (or, more accurately, in anticipation of that first negative NFP print and/or an unchanged MoM CPI reading), he said this week, on the way to reiterating that “no one” is so bold as to brave a long in the long-end.

The figure above shows… well, some lines. It shows some lines. One line’s an approximation of the real-time cost for the US to borrow out three decades, and the other line’s the average of the first line, computed using a rolling 200-day window.

When you spell it out like that (in line terms) it’s pretty silly, isn’t it? That’s a rhetorical question. Yes, it’s silly. All of this is silly. But, it’s entertaining and if you’re into lines, the 30-year testing the 200-day is meaningful. I suppose.

If you wanted to make a political point, you could start your 30-year chart from January of 2021 (i.e. post-“blue wave”) and you could start your y-axis with 1 to make things look even more dramatic. That’s what I did above. Because that’s what Hartnett did in his note.

Unspoken (in a lot of commentary, anyway) is the idea that this is all Democrats’ fault. As if the modern Republican party has ever lived up to its undeserved reputation as a bastion of fiscal rectitude when handed the keys to the castle (they haven’t, and they’re even less likely to during a prospective second term for Donald Trump, a raving-mad populist with half a dozen bankruptcies under his belt).

I’m certainly sympathetic to the bond bear case. I’ve written more than most about escalating demands on fiscal policy, whether from voters seeking better, more equitable social outcomes, rearmament, climate initiatives, and on and on. In that sense, I suppose I’m in the “secular bear” camp vis-à-vis bonds.

Note that the long bond’s annualizing a 15% loss for 2024 (figure above). That’d mark the third-worst annual showing in over a century, behind only 2009 and 2022. (Recall that the 10-year narrowly avoided an unprecedented third straight annual loss in 2023 thanks to a November-December stick save.)

On the other hand, not all of the structural factors behind the 40-year bond bull disappeared in the 2020s. Some will likely reassert themselves. Eventually. And as we saw in Japan, a determined central bank can cap yields in perpetuity, notwithstanding the RBA’s disastrous experience with YCC.

In the near-term, it’s worth noting that the first year of a new presidential cycle (so, 2025) typically sees government spending slow following an election-cycle splurge, as illustrated below.

It’s true that the US government’s spending lavishly, “but the fourth year of US presidential cycles is always the strongest for government spending,” Hartnett went on, adding that according to the May vintage of the bank’s Global Fund Manager survey, investors generally believe we’re moving beyond “peak fiscal,” so to speak.

So, while stubborn inflation’s likely to keep the Fed from cutting aggressively, and while America’s “unsustainable” fiscal trajectory will continue to make headlines (mostly because those sorts of headlines sell), the outlook over the next 12-24 months is easier monetary policy “at the margins” (as Hartnett put it) and tighter fiscal policy (again at the margins). That, he said, is bullish for bonds.

Of course, you could argue that the best case for bonds is simply an inevitable economic slowdown, but as Hartnett reminded investors, one of the factors which continues to bedevil bond bulls is the suspicion that governments, terrified of social unrest, will resort to more fiscal stimulus at the first sign of trouble. There are no fiscal hawks in fox holes, after all.