Bank of America forecasts an upturn after the worst performance for 30-year bonds in over 100 years

By Steve Goldstein

The 30-year is the 'obvious' pain trade, say strategists

The total return on 30-year bonds has declined by 45% since April 2020, the worst four-year loss in over 100 years, according to strategists at Bank of America.

That rough 30-year BX:TMUBMUSD30Y performance has come amid inflation that even after some cooling is still well above the Federal Reserve's target, as well as a wave of government spending.

Also read: It's been a century since corporate bonds have outperformed government debt like this

What was a "2+2=4" economy from the 1990s to the 2010s - i.e., 2% growth plus 2% inflation equals 4% nominal GDP growth - is now a "2+4=6" economy, meaning 2% growth + 4% inflation = 6% nominal GDP, said Bank of America strategists led by Michael Hartnett.

(The most recent GDP report, covering the first quarter, saw 1.6% real GDP growth and 4.8% nominal growth, but nominal growth did average about 6% last year.)

This strong nominal GDP growth is the catalyst for a big bear market in bonds as well as what they say is an "anything but bonds" bull market in credit, stocks and commodities.

Stocks SPX are in a late secular bull market, with no change in leadership since 2009, no recession to change it, and with valuations inconsistent with a new bull market, they say. Commodities are in an early secular bull market, driven by debt, deficits, inflation, AI, climate change and reverse globalization, with U.S. import tariffs the highest since 1971, they add.

But Hartnett and team say the 3Ps of positioning, policy and profits argue for a reversal of the ABB trade in the second half.

On positioning, no one is long the 30-year, which means it's the obvious pain trade in the second half.

Stagnation of real retail sales, the stalling of the global upturn in purchasing managers indices and labor market weakening argues for a risk to profits. As for policy, investors recognize fiscal stimulus is as good as it gets, and at the margin, easier monetary policy and tighter fiscal policy will be positive for bonds.

-Steve Goldstein

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05-17-24 1014ET

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