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when the market fell sharply in early august, bank of america reminded people to pay attention to key support levels. now, as the federal reserve is about to start cutting interest rates, bank of america believes that u.s. treasuries may fall and the bull market in commodities has just begun.

michael hartnett, a well-known strategist at bank of america, commented in his latest flow show notes that he sees an opportunity to re-enter the long-term bond trade, especially if the ism manufacturing index is greater than 49, which could push the 30-year bond yield above 4.3%.

secondly, hartnett also sees greater opportunities than the bond market. hartnett believes that in the 20th century, the average inflation rate was 5%. it was only due to the combined effect of rare factors such as globalization, low debt, demographic structure and technological disruption that inflation dropped to 2%. now these factors have reversed, and the commodity bull market has just begun.

the rising trend of us bonds is about to reverse

hartnett elaborated in more detail on why he expects “the bond frenzy of the past four months is about to reverse rapidly,” with the 30-year treasury yield falling from 4.75% to 4.0%:

seasonality: september is typically the second-largest month for corporate bond supply, averaging $135 billion over the past 4 years, low fms cash levels at 4.3%, and a surge in $180 billion in treasury supply;

geopolitics: conflict and protectionism have pushed up energy prices, with european natural gas up 70% since february.

positioning: 30-year treasury bonds moved from “oversold” in q1 to “overbought” today, with fms investors moving net ow bonds for the first time since march 2024.

extreme preemption of the fed: the market is pricing in a 200 basis point rate cut over the next 12 months, and despite the “v-shaped” recovery in risk assets, the fed remains as optimistic as possible, with the fed rate cut now fully priced in.

as hartnett points out, looking at us hiring, the last 6 times the private sector’s share of total wage growth fell below 40%, a recession followed. this is because the dominance of the labor market by “government and its friends” (education and health) runs counter to the bullish case for productivity, and “long bonds” once again become the best “hard landing” hedge.

the commodities bull market has just begun

in addition to long-term bonds, hartnett believes that a bigger opportunity may be emerging, and the commodity bull market has just begun:

as hartnett describes the shift from a 2% to a 5% world, inflation averaged 5% over the 20th century, and it was only the combination of rare factors such as globalization, low debt, demographics, and technological disruption that brought 20 years of 2% cpi, but the current reversal of these forces means a structural shift in inflation back to 5%.

hartnett further noted:

while most commodities appear to be in a secular bear market right now, this is about to change as the secular commodity bull market of the 2020s has just begun with an annualized return of 11%, and debt, deficits, demographics, deglobalization, ai, and net-zero policies are all inflationary.

this means that for a 60/40 balanced portfolio, commodities have delivered higher returns than bonds in the 2020s, and the total returns over the past 4 years do suggest so: the 30-year treasury yield is -39%, while commodities have returned +116%; even with falling inflation, the commodity index has delivered an annualized return of 10-14%, while a dovish fed would have delivered only +6%.