Bank of America Warns of Regime Shift in Monetary Policy
Bank of America strategists warn of a shift toward tighter monetary policy despite a muted stock market reaction to rising Treasury yields.
Strategists at Bank of America, led by Michael Hartnett, report that the stock market has remained largely resilient despite a global tightening cycle. While 10-year Treasury yields and the U.S. dollar rose following hawkish signals from Federal Reserve official Kevin Warsh, equities declined by only 1%, suggesting investor confidence in the ability of central banks to restore policy credibility.
Despite this stability, the firm warns of a genuine regime shift toward tighter policy. Hartnett highlighted elevated risk within the bond market's collateral system, noting a jump in the MOVE Index. Recent weekly flows support this caution, with $10.2 billion exiting stocks as investors rotated into bonds and cash.
Hartnett outlined three potential year-end scenarios. The bull case depends on a U.S.-Iran deal and falling oil prices, while the bear case envisions a bond tantrum deepened by Democratic wins in the Senate and Texas. The base case assumes policy interventions will cap yields to protect equity markets.
