Bank of America sees the next extreme market move in Treasuries: 'Pain trade is bond crash'

Published Fri, Jun 5 202011:37 AM EDT

(This story is for CNBC Pro subscribers only.) While the rally in stocks continues to intensify on optimism about a swift economic recovery, bond investors are at increasing risk of a summer of pain, according to widely followed Bank of America strategist Michael Hartnett. The bank's chief investment strategist is warning clients of an extreme move in Treasuries in the coming months, which could put stocks under pressure again. "Pain trade is bond crash," Hartnett said in a note on Friday. "Next extreme move is Treasuries: Biggest summer pain trade is disorderly rise in government bond yields ... Ultimately, disorderly rise in government bond yields forces correction." The stock market is experiencing a historic comeback as the economy started to emerge amid the pandemic. The S & P 500 just pulled off its greatest 50-day rally in history, jumping 37% over the period. The equity benchmark rose nearly 3% to about 3,200, less than 1% from turning positive for the year. Hartnett said the S & P 500 will hit a resistance level of 3,250 and fail to cross that. Hartnett has a wide following on Wall Street for his proprietary contrarian indicators. The strategist called the market bottom in March and the subsequent rebound . The sell-off in the bond market has already raised eyebrows on Wall Street this week. The benchmark 10-year Treasury yield , which moves inversely with bond prices, popped 11 basis points to 0.926%, the highest level since March 24. The benchmark rate has risen about 30 basis points this week alone, on pace for its best weekly performance since late February. The 30-year Treasury yield has also rebounded sharply, rising more than 30 basis points to about 1.745%. The long-duration rate dipped below 1% earlier this year, hitting a record low of 0.67% during the coronavirus crisis. The recent surge in Treasury yields was triggered by a shockingly strong jobs report that fueled expectations for the economy to roar back from the coronavirus. Employment unexpectedly rose by 2.5 million in May and the jobless rate declined to 13.3%. Economists surveyed by Dow Jones had been expecting payrolls to drop by 8.333 million and the unemployment rate to rise to 19.5%. The stimulus coming from global central banks also boosted bond yields. This week, the European Central Bank announced higher-than-expected purchases of euro zone debt. Meanwhile, the Federal Reserve has taken unprecedented actions to save the economy, including rate cuts and lending programs that could inject trillions of dollars into the economy. Hartnett said the "best buy" in stocks right now is either emerging-markets names (a bet on a peak in dollar) or small-cap value stocks, those still haven't made back all the losses from the pandemic.

People walk by the New York Stock Exchange (NYSE) on May 18, 2020 in New York City.

Spencer Platt | Getty Images

(This story is for CNBC Pro subscribers only.)

While the rally in stocks continues to intensify on optimism about a swift economic recovery, bond investors are at increasing risk of a summer of pain, according to widely followed Bank of America strategist Michael Hartnett.