EDITOR NOTE: While the specter of inflation remains a matter of debate among investors and financial institutions, Bank of America has taken a position on the matter, enough to suggest, surprisingly, that holding commodities in your portfolio would be a prudent step to take before a “tidal wave” of inflation wipes out stock and fixed income investors. According to BofA’s research, around 61% of the companies it had surveyed had already begun raising consumer prices. This is just the beginning of the inflationary trend. Other signs--the 30-year bond market has been significantly dropping since March of last year; what BofA calls the end of the 40-year bond bull market. Furthermore, BofA’s chief investment strategist, Michael Hartnett, warns that complacency is dangerous at this time. Commodities have always been considered a way to diversify from the stock market. But here we’re dealing with inflation, the kind we experienced in the 1970s. And the most direct way to activate not only capital preservation but growth during a severe inflationary period is by investing in non-CUSIP gold and silver.
Is Wall Street prepared to buck the multi-decade bond bull market?
That’s the question on the lips of one analyst who say the favorable conditions for the uninterrupted rally in government bonds could fade away over the next decade, and upset investors used to the steady decline in U.S. Treasury yields.
“2020 marked the secular low point for inflation and interest rates,” warned Michael Hartnett, chief investment strategist for Bofa Global Research, in a Thursday note. “The 40-year bull market in bonds is over.”
His cautionary words come as investors contend with the sudden surge in long-term Treasury yields this year which has surprised even the bond bears.
The 10-year note yield TMUBMUSD10Y, 1.614% was at 1.532% on Thursday, over 60 basis points from where it traded at the beginning of the year.
That rise has, in turn, heightened concerns around stretched valuations in equities, briefly sending the Nasdaq Composite COMP, -1.59% into correction territory this week, defined as a 10% fall from its intraday peak. Stocks have recently found their footing again, with the S&P 500 SPX, -0.51% up nearly 3% this week.
Investors throughout the multidecade long bull market in bonds have sometimes bet against a continued slide in long-term Treasury yields, but as inflation has struggled to break above the Federal Reserve’s 2% target for any sustained stretch, forecasts for higher yields have often proved a losing proposition.
Still, Hartnett suggested any complacency is dangerous as undercurrents in the economy and policymaking pointed towards a tidal wave of inflationary pressures that could overwhelm buyers of Treasurys.
He noted shorter-term and more cyclical forces such as supply-chain disruptions, efforts to re-shore manufacturing, and the eventual reopening of the U.S. economy would help push inflation higher.
A survey conducted by Bofa Global Research showed 61% of the companies had raised prices in the past few months.
And longer-term drivers of disinflation were poised to wane, too. Fiscal authorities were now more open to increased spending and central banks were now explicitly targeting higher inflation as a goal.
Hartnett anticipated the coming decade could show similarities to the late 60s and early 70s when inflation and interest rates started to lift off as investors questioned the combination of easy fiscal and monetary policy.
So what does this all mean?
First of all, investors will have to get used to a world of lower investment returns, while dealing with an upturn in volatility, said Hartnett.
And the ravages of inflation could turn negative returns in fixed-income into the norm. Instead, investors should look to take shelter in assets that tend to thrive during period of price pressures such as commodities.
Originally posted on MarketWatch