(Boursier.com) — The growing threat of interest rates remaining higher for longer is likely to hurt prospects for a soft landing for the U.S. economy and cause a sell-off in stocks over the next two months , according to Bank of America strategists cited by ‘Bloomberg’. The probability of a ‘soft landing’ is “around 20%”, but high bond yields, oil, and the dollar, as well as tightening financial conditions, “remain the risk of September-October”, according to BoA strategists led by Michael Hartnett.
Bank teams see risk that recession and rising unemployment will cause long-term government bond yields to rise – rather than fall – as markets shrug off panic over fiscal policy and that politicians spend to avoid social and political unrest.
“Yields will then reach terrible levels”, causing a “long and hard landing”, according to Michael Hartnett. “We will take advantage of any rebound in risk assets in the coming months to take a defensive stance and position ourselves for a hard landing.”
Rising bond yields also make stocks unattractive, with the S&P 500’s earnings yield of around 4.6% offering a lower return than three-month Treasuries of 5.5%. This negative gap of -0.9 percentage points is the lowest since 2000. According to the specialist, when this rate gap becomes negative, this opens the way to “less good” periods for risky assets.
In this context, flows to money market funds reached $68.4 billion last week, the highest level in almost two months. Since the start of the year, liquidity has already attracted $1,000 billion in assets, according to EPFR data taken by BoA. Conversely, and a sign of a certain tension on the markets, funds dedicated to tech recorded their first outflows in eleven weeks.
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