BofA's Hartnett warns of 'chilly summer' as real yields hit 2008 high

Real 30-year US yields hit their highest since November 2008, prompting BofA's Michael Hartnett to warn of a "chilly summer" for markets.

"Investors find themselves in a market where they can't buy bonds and can't sell stocks," Hartnett, chief equity strategist at Bank of America, said in a note published Friday.

The bank's proprietary bull & bear indicator remains stuck on a "sell" signal as financial conditions tighten, while money-market fund assets have clocked an all-time high — reflecting extreme investor caution. The 30-year real yield, which strips out inflation expectations, touched levels not seen since the depths of the global financial crisis, according to BofA data.

Hartnett identified four consensus views that, if wrong, could wrong-foot markets: no hard landing, no Federal Reserve rate hike before the November midterm elections, no cuts to hyperscaler AI capital expenditure, and no Democratic sweep of Congress. He recommended specific contrarian trades for each scenario.

The Consensus View and Its Risks

The prevailing market narrative assumes the economy avoids a hard landing, the Fed holds rates steady through the midterms, Big Tech maintains its AI spending trajectory, and Republicans retain control of Congress. Hartnett said any deviation from these assumptions would trigger sharp repositioning.

If the economy unexpectedly weakens, Hartnett recommends rotating into longer-duration bonds — where yields would likely fall — along with high-dividend stocks, consumer staples, and surprisingly, the Magnificent Seven mega-cap technology stocks, which he described as "defensive monopolies."

Should the Fed defy expectations and raise rates before November, BofA would go long the US dollar and add yield-curve flatteners — buying short-term bonds on the view they would underperform longer maturities.

The AI Capex Wild Card

An AI capital expenditure cut by hyperscalers would be the most alarming scenario, particularly for semiconductor stocks that have surged on the back of massive chip purchases. Hartnett noted that a capex pullback could, counterintuitively, boost software companies that have been sold off on fears that AI models would disintermediate their products. For the Magnificent Seven, reduced spending could improve cash flow and lower debt issuance, which analysts might prefer.

Gold as a Political Hedge

If Democrats defy current polling and win a clean sweep of the House and Senate in the midterms, Hartnett forecasts a falling dollar, falling stocks and falling bond yields. In that scenario, BofA would look to gold as the contrarian play. If President Donald Trump's approval ratings on inflation have not improved by September, the call would be to raise gold exposure well in advance of the elections.

Market Conditions

The US 30-year real rate's surge to post-2008 highs reflects persistent inflation expectations and the bond market's demand for higher compensation. A closely watched Treasury auction of 30-year bonds this week cleared at 5.058%, the highest in months, showing the pressure on long-dated government debt. The 10-year Treasury yield stood at 4.55%, up from 3.97% before the war with Iran began in late February.

BofA's bull & bear indicator, a measure of market positioning and sentiment, remains on a "sell" signal — a warning that has historically preceded periods of elevated volatility or drawdowns. Hartnett advised investors to brace for a challenging summer.

This article is for informational purposes only and does not constitute investment advice.