Bank of America Hartnett: Bottom-fishing U.S. Treasuries is the "biggest contrarian trade" of 2025

After a new round of sharp declines, is there a good opportunity to bottom out in U.S. Treasuries? One of "Wall Street's most accurate analysts," Michael Hartnett, has given a clear answer: the opportunity has indeed arrived.

Bank of America Chief Investment Officer Hartnett stated in his latest report that U.S. Treasury yields have broken through 5%, creating a quite attractive buying window, although this may be one of the least popular trades in the current market sentiment.

According to Bank of America data, the rolling return of the U.S. 10-year Treasury bond has already fallen into negative territory, comparable to the level of neglect faced by U.S. stocks in 2009 and commodities in 2018.

A more striking comparison is that after the U.S. lost its last AAA rating, the yield on Microsoft bonds has fallen below that of U.S. Treasuries during the same period. The yield spread between 30-year Treasuries and Microsoft bonds has narrowed to a historic low of just 20 basis points, indicating that the market perceives Microsoft's credit risk to be lower than that of the country behind this global reserve currency.

Hartnett believes that the technical rebound of U.S. long-term bonds may provide investors with an excellent opportunity to position against the trend, especially at yield levels exceeding 5%.

"ABB Trade" Dominates Wall Street

In his latest "Flow Show" report, Hartnett used a vivid metaphor to describe the U.S. fiscal deficit: if you spend $100 every second, it would take a full 2,248 years to exhaust the $7.1 trillion spent by the U.S. government last year.

With the "big beautiful" tax cuts from the Trump era being pushed forward again, Hartnett expects the combination of "rising yields and falling dollars" (i.e., 30-year Treasury yields above 5% and the dollar index falling below 100) to put pressure on risk assets.

Notably, in January of this year, the rolling return of long-term bonds' 10-year yield had dropped to negative 1.3%. Such a "shameful" performance is reminiscent of the U.S. stock market's -3.4% in February 2009 (the worst since 1939) and commodities' -7.7% in June 2018 (the lowest since 1933).

Hartnett pointed out that as the bull market for 40-year bonds experiences a severe reversal, "Anything But Bonds" (ABB) has become the most widely recognized investment strategy on Wall Street in the 2020s There are four major driving forces behind it:

Inflation Pressure: Over the past five years, inflation has accumulated to a 25% increase. A basket of goods that was valued at $100 in 2020 now sells for $125 in the US and Europe, and even reaches $127 in the UK.

Monetary Policy Missteps: Since the Federal Reserve unexpectedly cut interest rates by 50 basis points in September last year against the backdrop of inflation, the yield on the US 10-year Treasury bond has risen by 100 basis points, while yields on UK, German, and Japanese government bonds have generally increased by 50 to 100 basis points. In contrast, China's yields have decreased by 40 basis points, highlighting the loss of credibility of major central banks in combating inflation.

Fiscal Policy Out of Control: Over the past five years, the average annual federal budget deficit in the US has accounted for 9% of GDP, and Moody's predicts that this level will be maintained until 2034. Current annual net interest expenses have reached $1 trillion, and the debt ceiling may need to be raised to $40 trillion by 2025.

Aggressive Trade and Industrial Policies: Currently, tariffs in the US account for 12% of total imports, the highest level since 1941. The first-round effects of such strong interventionist policies are primarily inflationary rather than suppressing inflation.

A Historic Moment for Contrarian Positioning?

Despite various unfavorable factors, Hartnett once again urges investors to "buy humiliated assets and sell arrogant assets." He believes that the key catalysts supporting the bond bear market of the 2020s have largely been reflected in the market by 2025—perhaps not fully priced in, but already very much so.

The "BIG Strategy" proposed by Hartnett (Bonds, International stocks, Gold) has performed well this year: government bonds are up 4%, international stocks are up 13%, and gold is up 25%. However, the 30-year US Treasury bond has still recorded a -2.5% negative return since the beginning of the year, indicating that the market remains skeptical about long-term bonds The key point is that a yield of over 5% is a double-edged sword for the highly financialized U.S. economy, especially given its significant relative disadvantage in a global context. The "vigilante" role of the bond market also prompts investors to impose punitive pricing on the current debt and deficit trajectory of the United States.

Hartnett particularly emphasizes that a critical warning point is that the "magic number" for the 5-year U.S. Treasury yield is 3.25%. Once it exceeds this level, the annual interest expenditure of USD 1.2 trillion will accelerate; staying below this level will help maintain fiscal stability.

For Hartnett, a 30-year U.S. Treasury yield exceeding 5% is precisely the entry point for a "long-end gamble." Because once the market "loses confidence in the long end (and the dollar)," the consequences could be devastating for the stock market. And in this trade, which is the most overlooked and even ridiculed on Wall Street, perhaps a historic reversal is brewing.

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk