‘Sentiment has gotten very bullish’: BofA says bonds rival stocks in rare moment
Bonds are offering genuine competition to stocks for the first time in decades, BofA argues / Photo: planger / Shutterstock
Equities face a genuine rival in bonds for the first time in decades, BofA head of U.S. equity and quantitative strategy Savita Subramanian told Bloomberg Television in an interview. Elevated investor sentiment leaves stocks more exposed to disappointment than poised for further gains, in her view.
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The risk-adjusted return on the 10-year U.S. Treasury now exceeds 5%, Subramanian said. Meanwhile, her team estimates that the S&P 500’s return over the next 10 years may not reach that level.
“For the first time in decades, bonds actually look interesting again,” Subramanian told Bloomberg. She said U.S. policymakers are focused on preventing longer-term rates from rising too high, with both the Fed and the Treasury secretary paying close attention to the long end of the yield curve. Demographic trends may also suggest that rates have a lower ceiling than they did in the 1970s and 1980s, while AI could eventually exert disinflationary pressure, she added.
That creates a potentially more attractive backdrop for bonds, as yields may be unlikely to rise much beyond 6-7%. While those levels would be high, equities should be able to withstand them, she noted.
Stocks have so far remained resilient in the face of rising yields, Bloomberg notes. The S&P 500 closed at a record on Tuesday for the first time since August, buoyed by solid corporate profits and the outlook for AI spending. Subramanian sees this investor optimism as a potential risk, noting that analysts are forecasting all-time highs in earnings growth for the S&P 500 over the next five years. “When expectations are this high, you’re more primed for disappointment than actual positive surprise,” she said. “This is not the tech bubble of 2000, but I do worry that sentiment has gotten very bullish.”
What's going on in the bond market?
The 30-year U.S. Treasury yield rose as high as 5.73% in U.S. trading on Wednesday, while the 10-year yield reached 5.36%, their highest levels since 2002. The papers had reached these levels not long ago before seeing a modest pullback in yields. Recall that bond prices and yields move in opposite directions.
A bruising selloff in bonds in recent months has been fueled by a sharp repricing of expectations for U.S. interest-rate hikes to contain energy-driven inflation, Bloomberg notes.
