Why has Wall Street quietly begun to allocate to safe-haven assets? Bank of America Hartnett: "Nixon Replayed" under pressure on U.S. Treasuries

On Monday, Michael Hartnett, Chief Investment Strategist at Bank of America, warned in a recent report that Wall Street institutions have begun quietly allocating to safe-haven assets such as gold and cryptocurrencies, betting that central banks will be forced to implement yield curve control (YCC) policies to stabilize the bond market.

Hartnett likened the current market environment to the Nixon era from 1970 to 1974, predicting that the Federal Reserve will face immense political pressure to implement easing policies to create pre-election prosperity. He advised investors to go long on gold, bonds, and small-cap stocks in preparation for the upcoming YCC policy.

The Bank of America report indicated that the next major trend in bond yields is a decline rather than an increase, with 54% of investors expecting central banks to adopt price maintenance operations (PKO) such as yield curve control to address the rising disorder in debt costs. This policy shift could trigger a new wave of enthusiasm for risk assets, particularly in the gold and cryptocurrency markets.

Currently, the global bond market is facing the most severe sell-off since 1998, with UK long-term government bond yields soaring to 5.6%, a new high since 1998, and the yield on U.S. 30-year Treasury bonds approaching the 5% mark. Risk assets have yet to show a transmission effect, with high-yield bond credit spreads remaining at 320 basis points, well below the 400 basis points warning line, and bank stocks in Japan, France, and the UK remaining stable, indicating that the market is digesting expectations of central bank intervention.

Bond Market Crisis Spreads, Governments Face Trust Crisis

Long-term government bond yields in major global economies have reached multi-year highs, reflecting deep concerns among bond investors about government fiscal conditions. UK long-term government bond yields have risen to 5.6%, the highest level since 1998; France has reached 4.4%, a new high since 2009; and Japan has climbed to 3.2%, hitting a peak not seen since 1999.

Behind the bond sell-off is investor skepticism regarding the governing capabilities of various countries. UK Prime Minister Keir Starmer's approval rating has plummeted to 11%, the lowest since Liz Truss; French President Emmanuel Macron's approval rating has dropped to 19%, the worst performance since 2016; and the ruling Liberal Democratic Party in Japan has an approval rating of only 24%, also a new low since 2012.

In the past 18 months, out of 43 elections globally, 32 have resulted in defeats for the incumbent government, and bond investors are preemptively digesting the fiscal risks that populist policies may bring. Hartnett pointed out that the bond market is precisely targeting the most vulnerable and unpopular governments.

Expectations of Central Bank Intervention Support Risk Assets

Historical data shows that when bond yields rise, credit spreads widen, and bank stocks decline, it typically triggers a market correction of over 10%. However, the current situation is different—high-yield bond credit spreads remain at 320 basis points, and bank stocks in Japan, France, and the UK are performing steadily, indicating that the market expects central banks to intervene Hartnett believes that the next round of bond yields will decline significantly rather than rise. Policymakers typically engage in price maintenance operations, including reversal operations, quantitative easing, and yield curve control, when faced with rising government debt costs. The Bank of America Global Fund Manager Survey shows that 54% of investors expect the implementation of YCC policy.

The Federal Reserve is under immense political pressure to cut interest rates, while weak U.S. economic data provides a reasonable basis for rate cuts. In July, construction spending fell by 2.8% year-on-year, home prices have declined for four consecutive months, and JOLTS employment data supports the Fed's rate cuts, as AI technology begins to impact the job market.

Nixon Model Replayed: Monetary Easing Under Political Pressure

Hartnett compares the current situation to the Nixon era from 1970 to 1974, arguing that this is the best reference for understanding policy volatility, central bank tolerance for rising inflation, and dollar depreciation. The 1970s faced multiple challenges, including protectionism, monetary instability, and massive budget deficits, with the ultimate winners being small-cap stocks, value stocks, commodities, and real estate.

The policy characteristics of Nixon's first term from 1969 to 1973 included:

Geopolitical realignment, trade wars, pro-cyclical fiscal and monetary policies, dollar depreciation, and the politicization of the Federal Reserve. To create pre-election prosperity, the government significantly eased financial conditions from 1970 to 1972, with the federal funds rate dropping from 9% to 3%, U.S. Treasury yields falling from 8% to 5%, and the dollar depreciating by 10%.

The stock market rose over 60% during this period, led by "Nifty Fifty" concept stocks, growth stocks, energy, and consumer sectors. However, this prosperity faced a major rupture in 1973-1974, with inflation soaring from 3% to 12%, price controls failing, and the Fed being forced to aggressively raise interest rates, leading to a 45% stock market crash.

Bank of America states that unless a second wave of inflation and/or negative non-farm payroll data occurs, causing the U.S. deficit to jump from 7% to over 10% of GDP/default concerns, U.S. bond yields will trend towards 4% rather than 6%. This will support the stock market's breadth expansion through structurally under-favored long-duration sectors (such as small-cap stocks, real estate investment trusts, and biotechnology); additionally, they remain bullish on gold and cryptocurrencies, while shorting the dollar until the U.S. commits to implementing YCC.

"Invisible Hand" Turns to "Visible Fist"

Although Trump has not explicitly announced price control measures for 2025, the trend of the U.S. government intervening in the economy and markets for political purposes is clearly on the rise. Trump is well aware that a second wave of inflation will be unpopular before the midterm elections, thus employing subtle means to control prices and increase supply.

In the energy sector, a "drill, baby, drill" deregulation and peace efforts in Ukraine have led energy stocks to decline by 3% since the election; in healthcare, an executive order has been signed to reduce U.S. drug prices to "most favored nation" levels, causing healthcare stocks to drop by 8%; in housing, a "national housing emergency" has been declared to improve housing affordability through increased supply, leading homebuilders to fall by 2% The market continues to support Trump's political agenda by shorting the "inflation-boosting" sector. Utilities have become the next vulnerable target, as Trump promises to halve electricity prices within 12 months, while the Energy Secretary is most concerned about AI-driven surges in electricity prices.

Bank of America believes that as long as Trump's approval rating remains above 45%, this trend may continue, but if it falls below 40%, it could end unfavorably.

Asian Investor Perspective: YCC Expectations and Tail Risk Mitigation

Hartnett's recent research in Tokyo and Singapore shows that domestic Japanese investors are less bearish on Japanese government bonds compared to foreign investors. Japan's cyclical deficit is under control, the central bank is slowly raising interest rates, and the Ministry of Finance is happy to use debt concerns to resist political pressure to reduce consumption tax.

Japanese investors are more worried that the combination of a "lagging interest rate-hiking central bank" and a "lagging interest rate-cutting Federal Reserve" could lead to a disorderly rise in the yen. Many Tokyo investors expect the U.S. will eventually resort to YCC policy. There are few concerns about trade tariffs, and Japanese investors are willing to "spend money to buy a ticket" to enter the U.S. market.

Singaporean investors believe that Trump's policy shift towards lowering tariffs, taxes, and interest rates significantly reduces global tail risks. They are less bearish on the dollar compared to European investors and cautiously bullish on a global equity portfolio of U.S./China tech and Japan/Europe banks, believing that only an economic recession could break the trend of risk assets