BofA's Hartnett urges commodity and gold positions as policy caps bond yields

Bank of America strategist Michael Hartnett is advising investors to keep long positions in commodities and gold. He argues that central banks are actively intervening to cap bond yields and stabilize financial markets.

This policy shift matters because it signals a new floor for asset prices driven by institutional defense mechanisms rather than pure market forces. Hartnett noted that "policy panic [is] working," pointing to the strengthening Japanese yen and efforts to protect specific thresholds like 5% Treasury yields, 160 dollar-yen, and $4-a-gallon gasoline.

Despite these interventions, central banks are still pushing interest rates higher to preserve their credibility. In this environment, Hartnett views commodities and precious metals as essential hedges against currency debasement.

The strategist highlighted a stark divergence in long-term asset performance. While 10-year rolling returns for U.S. equities and commodities sit at 15% and 11% respectively, Treasuries have posted a negative 2% return.

Hartnett described this Treasury performance as the weakest decade in a century. He added that such negative long-term returns have historically marked favorable entry points for investors, similar to conditions seen in 1939, 1974, and 2009 for stocks, and 1933 and 2018 for commodities.

Looking ahead, Hartnett warned that markets are currently underpricing the risks associated with the upcoming U.S. midterm elections. Although a Democratic sweep is considered unlikely due to the Senate map, the administration's reliance on executive action keeps political uncertainty elevated.

Current indicators show Trump holding an approval rating between 35% and 40%, well below the historical average of 53% at this stage in the cycle. Meanwhile, prediction markets are pricing in a 50% probability of a Democratic sweep.

A Democratic victory would likely trigger a risk-off environment, potentially driving equities down by more than 10% alongside lower bond yields and a weaker dollar. Conversely, an unexpected Republican sweep would encourage further risk-taking.

Hartnett described a split outcome, where Republicans keep the Senate and Democrats take the House, as a modest risk-on scenario. He characterized this potential legislative stalemate as "gridlock = goldilocks."

These strategic shifts are already visible in recent capital allocations. In the week ending September 2, cash funds led inflows with $30 billion, followed by bonds at $18.3 billion.

Gold attracted $3.2 billion, while equities saw just $2.8 billion. That equity figure marked the smallest weekly inflow for the asset class in nine weeks.