No economic recession means higher interest rates! Bank of America significantly raises expectations for US bond yields.

Bank of America warns that the global bond market will face challenges this year and has significantly raised its forecast for bond yields, citing the resilience of the economy and expectations of tighter monetary policy. However, they believe that the bond market outlook for 2024 is "constructive".

Currently, Bank of America expects the United States to avoid an economic recession and predicts a slight increase in economic growth and inflation in the eurozone. Last week, Bank of America became the first major Wall Street bank to officially change its economic forecast for the country in light of the increasingly optimistic outlook, stating that a "soft landing" is the most likely outcome.

Bank of America's core logic is that no economic recession in the United States means higher interest rates, especially at the front end, so they recommend underweighting short-term US Treasuries. A soft landing could also prolong the Federal Reserve's balance sheet reduction (QT) and increase the demand for US bonds. Bank of America expects the Federal Reserve to raise interest rates by another 25 basis points later this year, which remains their baseline expectation, but they anticipate a much slower pace of rate cuts next year compared to previous expectations.

Bank of America predicts a "significant upward" movement in US bond yields, with the two-year Treasury yield expected to reach 4.75% by the end of this year, up from the previous estimate of 4.25%; and the ten-year Treasury yield expected to reach 4% by the end of this year, up from the previous estimate of 3.5%. At the close of trading on Monday in New York, the benchmark 10-year US Treasury yield rose by 5.26 basis points to 4.0864%. The two-year Treasury yield increased by 1.04 basis points to 4.7724%.

In the eurozone, Bank of America's revised forecast predicts that the ten-year German bond yield will peak above 2.6% in the short term and then decline to 2.4% by the end of the year (previously forecasted at 2.25%), and further decline to 2% by the end of 2024 (previously forecasted at 1.9%).

Bank of America still expects upward pressure on 5-10 year government bond yields in Europe, with a steepening yield curve from 2-year to 10-year maturities in August and September. They believe that the current pessimism in the European market may be overshadowing better-than-expected economic data, and there will be an increase in the supply of core and semi-core bonds.

As for Japan, Bank of America's revised forecast for Japanese government bond yields is as follows: a 10-year JGB yield of 0.75% by the end of the year, and a 30-year JGB yield of 1.50%. They also anticipate overall weak demand for Japanese government bonds.

Bank of America also highlights the potential correlation between US and Japanese bonds. The absence of an economic recession and a soft landing in the United States implies reduced demand for safe-haven bond purchases, putting upward pressure on yields of government bonds worldwide, including Japanese government bonds. On the other hand, the recent policy adjustments by the Bank of Japan to its yield curve control pose an upward risk to US bond yields, resulting in a steeper yield curve for US bonds. In the latest report, strategists at Bank of America also wrote that hedge funds are bearish on the US dollar, and they are more skeptical of the dollar than ever before, based on historical levels. In addition, hedge funds are also skeptical of the Swiss franc. Bank of America's related data backtested the position holdings since 2012.