Bank of America: "the market will force the Fed to YCC", which is the "short -, medium-and long-term" trading logic.

In its latest report, BofA linCIO Michael Hartnett examines the biggest driver behind the wave of re-inflation-the number of novel coronavirus vaccines delivered worldwide has reached 400m, far surpassing the 122 million cases of novel coronavirus.

This is why the market believes that the "surplus" of novel coronavirus vaccine will offset the spring vaccine shortage in Europe and emerging markets in the autumn, but the resulting disorderly rise in bond yields will have a negative impact on economic growth in the second quarter.

Moreover, the unprecedented fiscal stimulus unleashed by most advanced economies, especially the US, is the "other elephant" in the room. The US budget and current account deficit will exceed $4,000bn in 2021 and $2,000bn in 2022, not including the $1.5 trillion-$2tn infrastructure stimulus bill likely by the Biden administration.

Treasury issuance so far this year is $861 billion, investment grade and high-yield debt is $514 billion, equities are $178 billion (including SPACs), are at record highs, and total annualised supply of bonds and equities is a record $7.6 trillion), according to Hartnett. It is also worth noting that the issuance of US $4.45 trillion treasury bonds this year easily exceeded that of Germany's GDP,. No wonder the performance of 30-year US Treasuries at the beginning of the year was the second worst in a century.

With the fiscal stimulus "flooding", Hartnett believes that the current economic boom will dominate for a long time, and we are witnessing the strongest macroeconomic data of our lifetime: the Philadelphia Fed manufacturing index is the highest since March 1973. Surveys by the Philadelphia and New York Fed show that price pressures soared in early March, the number of "jobs difficult to fill" in US small businesses reached the highest level in 50 years, and US house prices rose 19 per cent. China's exports rose 60 per cent year-on-year, and Baltic shipping charges rose 95 per cent year-on-year. As the supply chain is broken, commodity shortages contribute to rising inflation.

The Fed believes that price increases are only temporary and promises to keep monetary policy loose and will not raise interest rates until 2023. But Hartnett believes that the Fed's dovish stance will be counterproductive and that bond market "volunteers" will join forces to force the Fed into the corner of the yield curve to control (YCC). Once the interest rate on five-year Treasuries exceeds 1.25%, the Fed may have to YCC.

This is because US financial assets account for more than 600 per cent of global GDP. In addition, the yield on US 10-year Treasuries has risen by 1 per cent in the past six months. If that figure is 1 per cent higher than the CBO benchmark interest rate, it will increase the deficit from 2021 to the next 30 years to 10 times the budget. As a result, long-end interest rate control is assured.

If the Fed does launch YCC, it will trigger serious asset volatility. The dollar may rise before that, but any announcement and rhetoric announcing a shift to YCC could trigger a big bear market in the dollar.

At the same time, emerging markets have begun to tighten policy to curb runaway inflation. Turkey and Brazil have raised interest rates in the past week, making the world's central banks raise interest rates more often (eight times) than cut rates (five times) so far this year. Not only in emerging markets, but also in the developed world, the Norwegian central bank became the first central bank to raise interest rates. No matter how long the ostrich mentality of the Federal Reserve, the European Central Bank and the Bank of England lasts, the global financial environment has begun to tighten, and it is clear at a glance at interest rate spreads and volatility.

Hartnett gives three predictions for the short, medium and long term:

Short-term: cyclical stocks have risen on the back of the economic boom and Goldilocks expectations, while technology stocks, bonds and emerging markets have pulled back; the short-term risk is a disorderly jump in bond yields and cyclical varieties. the collapse in oil prices over the past two days is the first sign of a shift to high yields-low growth rates.

A basket of interest-sensitive assets is starting to suffer, with utilities and essential consumer goods and good defensive targets.

Medium term: Hartnett believes that due to the peak of position (Position), profit (Profit) and policy (Policy) triple P in the first half of the year, interest rate (Rate), regulatory (Regulation) and redistribution (Redistribution) triple R rebounded in the second half of the year, and the asset return in 2021 is characterized by low return and high volatility. So the medium-term trading advice is to buy volatility.

Long-term: 2020 marks a long-term low in inflation and interest rates, and the 40-year bull market in bonds is officially over.

Long-term asset allocation, bullish on real estate, commodities, volatility, small-cap stocks, value stocks and EAFE/ emerging market stocks; bearish bonds, the dollar, the market growth stocks.