Sell U.S. Treasuries Before They ’Crash,’ Bank of America Says

Investors should sell U.S Treasuries and buy bank stocks because bonds may be headed for a “crash,” according to Bank of America Corp.

“It’s hard to believe that the greatest bond bull market in history will end without some bloodshed,” Michael Hartnett, the bank’s chief investment strategist, wrote in a client note yesterday. “Risks of a bond crash are high.”

Markets are getting nervous about the possibility the Federal Reserve will taper its debt-buying program, according to Hartnett, who is based in New York. Fed Chairman Ben S. Bernanke said week last the central bank could curtail its $85 billion in monthly Treasury and mortgage bond purchases if policy makers are confident that improvements in economic growth are sustainable.

U.S. debt has dropped 1.8 percent in May, the steepest monthly loss since December 2009, according to the bank’s indexes. Benchmark 10-year yields declined from 15.8 percent in September 1981 to a record low of 1.38 percent in July last year. The move resulted in a gain of more than 1,000 percent for the bank’s Treasuries index.

The yield on 10-year Treasury dropped two basis points, or 0.02 percentage point, to 2.09 percent as of 8:46 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.75 percent note due in May 2023 rose 6/32, or $1.88 per $1,000 face amount, to 96 31/32. The yield reached 2.23 percent on May 29, the highest level since April 5, 2012.

“Major breakouts in equity markets tend to coincide with major inflection points in bond yields,” Hartnett wrote. The Standard & Poor’s 500 Index (SPX) has climbed 16 percent this year, and it set an all-time high of 1,687.18 on May 22.

Bank of America’s bond strategists predict the 10-year yield will rise to 2.25 percent by year-end, according to the report. The company’s economists forecast the Fed will begin paring its bond purchases in April, it said.

The bank is bullish on U.S, European and Japanese banks, along with equities from emerging markets such as Brazil, China, India, Turkey and Russia, according to the report. It is negative on emerging market bonds.

To contact the reporter on this story: Kenneth Foo in Singapore at kfoo23@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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