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The Flow Show
Bonds & Bubbles
25 May 2023 | Investment Strategy | Global
Key takeaways
Equity flows now flat YTD vs huge $756bn inflow to cash in '23
4% real yields popped internet, 3% popped subprime, +250bps crashed crypto, market saying 150bps too low
to pop AI
But don't chase here...financial conditions tightening again & once global HY bonds back above >550bps risk-off
returns
Chart 1: BofA Bull & Bear Indicator
Remains at 3.5
3.5
4 6
Buy 2 8 Sell
0 10
Extrem e Extrem e
Bearish Bullish
Scores on the Doors: crypto 60.0%, stocks 6.5%, gold 6.4%, HY bonds 3.0%, IG bonds 1.8%, cash 1.7%, US dollar 0.7%, govt bonds 0.0%, oil -7.4%,
commodities -9.2% YTD.
Zeitgeist I: "I mean, if you're going to lose your job and be replaced by AI in the next few years, might as well own some AI as a hedge, no?"
Zeitgeist II: "Bubbles not easy, put plenty of investors out of business. But this one you getting paid by fat yields in cash & bonds to ignore for now. Why no
FOMO yet."
Zeitgeist III: "4% real yields popped internet bubble, 3% popped subprime, crypto crashed on real yield rip from -100bps to 150bps. But market telling you
real rates may need to rise another 100-150 bps from here to pop 'baby bubble' in AI."
The Price is Right: Japanese real yields (JGB yield minus current CPI) at 50-year lows, Nikkei at 30-year highs, yen sinking; Japan where financial conditions
super-easy.
th
Tale of the Tape: June 14 FOMC Fed hike expectations up from zero to 12bps (despite debt ceiling kabuki), Nasdaq taking 10-year Treasury yield back to
4%, US$ surging in May (see CNY), financial conditions tightening again; once spreads in creaking global HY bonds back above >550bps, we expect another
bout of risk-off to return late June.
The Biggest Picture: US national debt $31.8tn, US govt spending $6.2tn, US deficit $1.6tn, Medicare/Medicaid spend $1.6tn, Social Security $1.3tn,
Defense $785bn, debt interest $572bn; war, debt, economic nationalism, de-globalization, net zero, inclusion all inflationary, no sign of pause/pivot in US,
UK, EU, Japan core inflation (Chart 2).
Chart 2: No pause or pivot in core inflation trend in US, UK, EU, Japan
US CPI less food & energy
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Accessible Version
305
US core CPI +14%
290
275
260
245
230
215
'10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 '24
Source: BofA Global Investment Strategy, Bloomberg
More on page 2…
Weekly Flows: $23.1bn to cash, $9.5bn to bonds, $0.1bnn to gold, $3.9bn from stocks.
Flows to Know:
Cash: meaty $23.1bn inflow; YTD inflow now $756bn (c/o 2020 inflow $917bn);
rd
Stocks: 3 week of outflows ($3.9bn) & equity flows now flat YTD;
th
Bonds: 9 week of inflows ($152bn inflows YTD)…big preference for quality…IG bonds $101bn inflow YTD vs HY bonds $9bn outflow YTD;
th
Tech: more inflows ($0.5bn), 6 straight week, albeit small;
BofA Private Clients: $3.1tn AUM…59.7% stocks, 21.6% bonds, 11.9% cash; largest weekly outflow from stocks since Nov'22; private clients selling energy,
bank loan, EM debt ETFs, buying precious metals, value funds & munis ETFs past 4 weeks.
BofA Bull & Bear Indicator: remains at 3.5, highest level since March.
Chart 4: Private clients have been sellers of stocks in 2023
BofA Private Client (GWIM) flows to equity 4-week MA (% of AUM)
Chart 5: Bubbles for the Few, Bears for the Many
America's Magnificent Seven
Source: BofA Global Investment Strategy, Bloomberg, *equal-weighted AAPL + MSFT + GOOGL + AMZN + NVDA + META + TSLA
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8.0 AI
CRISPR
EV
7.0 Bitcoin
iPhone
Social media
6.0
4.0
Word processor No conviction in macro narrative of 2023
Microprocessor
3.0
Man on moon
means big conviction in new micro
Polio vaccine
narrative of AI.
2.0 Model T car
Light bulb
1.0 Telegraph
Printing press Telescope Steam engine
0.3
0.0
1000 1061 1122 1181 1242 1303 1365 1426 1487 1547 1608 1669 1731 1792 1853 1912 1973 2034
Chart 7: Real rates not yet hurting
US 10-year real rate (GTII10 Govt)
Chart 8: Where did my EPS recession go?
S&P 500 EPS and consensus forecast
200 COVID
-15% Market has flipped from EPS recession
175
to no recession as inflation, fiscal
150
stimulus, labor market boosted nominal
125 GFC GDP which should be good news…unless
100 -34%
DotCom of course debt ceiling ends fiscal
75 -28%
stimulus, slow deterioration in labor
50
market accelerates…
25
'99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19 '21 '23 '25
Chart 9: Capex cycle tied closely with relative performance of stocks vs bonds
US core capital goods orders and DJIA vs Treasuries price relative
Chart 10: China exports weak…
China exports to US and rest-of-world
660
3000 China exports ex-US (12m cumulative, $bn)
China exports to US (12m cumulative, $bn - RHS) 580
2500 500
And weak Chinese renminbi a sign that
2000 420 world's #2 economy is in a bit of trouble
1500 340 again…domestic demand slowly
260 improving…but with exports to China's
1000
180 largest export market the US -11% past
500 12 months, export economy needs a
100
devaluation boost again.
0 20
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24
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Accessible Version Chart 11: Credit…the great canary, HY bonds, not trading well at all
Global HY bond prices
Table 2: Net fund inflows to EM, outflows from DM YTD
Fixed Income Flows (Chart 12) Global equity flows by region
IG bond inflows past 8 weeks ($8.2bn)
Wk % AUM YTD
HY Bond outflows past 3 weeks ($0.3bn) Total Equities 0.0% -330
long-only funds -0.1% -87,513
EM Debt outflows past 3 weeks ($0.8bn)
ETFs 0.1% 87,864
Munis outflows resume ($0.5bn) Total EM -0.1% 55,027
Govt/Tsy inflows past 15 weeks ($4.9bn) Brazil 1.5% -848
Russia 0.0% -19
TIPS outflows past 39 weeks ($1.2bn)
India 0.4% 1,681
Bank loan outflows past 18 weeks ($0.6bn) China 0.0% 26,796
Total DM 0.0% -55,357
US 0.0% -68,328
Equity Flows (Table 2) Europe -0.1% -13,376
US: outflows past 6 weeks ($1.5bn) Japan -0.2% -6,974
International 0.0% 33,379
Japan: outflows resume ($1.2bn)
Total Equities = Total EM + Total DM
Europe: outflows past 11 weeks ($1.9bn) Source: EPFR Global
Chart 12: FICC inflows to Treasuries, cash, IG bonds, outflows from TIPS, bank loan
Weekly FICC flows as a % AUM
Govt/Tsy
Money-market
Corp IG
Gold & Silver
Corp HY
Commodities
EM debt
Bank loan
TIPS
-0.8% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6%
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Chart 13: GWIM clients buy gold, sell energy past 4 wks Chart 14: GWIM equity allocation at 60%
BofA private clients 4-week ETF flows as % of AUM BofA private client equity holdings as % of AUM
Precious 68%
Value BofA GWIM private clients 66%
Municipals Cumulative 4w flows as % AUM 63% 63%
Japan
IG
Low-vol
MLP 58% 56%
Healthcare
Tech
Utilities 53% 56% Avg
Staples 54%
Industrials
Dividend
Cons. Disc. 48%
US
HY
Materials 43%
Growth GWIM Equity as % AUM
Financials 39%
TIPS
REITs 38%
EM debt '05 '07 '09 '11 '13 '15 '17 '19 '21 '23
Bank loan
Energy
-7% -6% -5% -4% -3% -2% -1% 0% 1% Source: BofA Global investment Strategy
Source: BofA Global Investment Strategy Source: BofA Global Investment Strategy
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH
Chart 17: GWIM ETF holdings as % of AUM Chart 18: GWIM top 10 stocks for 1-year SPX beta
BofA private client ETF holdings as % of AUM 1-yr S&P 500 beta for top 10 stocks held by BofA private clients
1.50
1.40 GWIM top 10 stocks, 1-year SPX beta
18% Debt ETFs % debt holdings
16.7%
1.30
16%
14%
Equity ETFs % equity holdings
14.2% 1.20
12%
10% 1.10
8%
6%
1.00
4%
2%
0.90
0%
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 '24 0.80
0.70
0.60
'08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23
Source: BofA Global Investment Strategy
BofA GLOBAL RESEARCH Source: BofA Global Investment Strategy. Cash & T-bills.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023*
Commodities US Treasuries Commodities MSCI EM REITS MSCI EM REITS MSCI EM US Treasuries MSCI EM Gold US Treasuries REITS S&P 500 S&P 500 S&P 500 Commodities MSCI EM Cash S&P 500 Gold Commodities Commodities MSCI EAFE
58.2% 6.7% 39.5% 56.3% 32.0% 34.5% 37.5% 39.8% 14.0% 79.0% 29.2% 9.8% 23.8% 32.4% 13.7% 1.4% 17.5% 37.8% 1.8% 31.5% 24.8% 46.3% 31.1% 9.5%
US Treasuries Global IG Gold MSCI EAFE Commodities Commodities MSCI EM Commodities Gold Global HY MSCI EM Gold Global HY MSCI EAFE REITS US Treasuries Global HY MSCI EAFE US Treasuries REITS MSCI EM REITS Cash S&P 500
13.4% 4.6% 25.6% 39.2% 28.7% 33.7% 32.6% 33.0% 4.3% 62.0% 19.2% 8.9% 19.3% 23.3% 11.7% 0.8% 14.8% 25.9% 0.8% 27.4% 18.8% 37.1% 1.5% 7.9%
REITS Cash Global IG REITS MSCI EM Gold MSCI EAFE Gold Cash MSCI EAFE REITS Global IG MSCI EM Global HY US Treasuries Cash S&P 500 S&P 500 Gold MSCI EAFE S&P 500 S&P 500 Gold Gold
8.5% 4.4% 14.9% 33.5% 26.0% 17.8% 26.9% 31.9% 2.1% 32.5% 15.9% 4.5% 18.6% 8.0% 6.0% 0.1% 12.0% 22.0% -1.9% 22.8% 18.4% 28.7% -0.8% 7.3%
Cash Global HY US Treasuries Commodities MSCI EAFE MSCI EAFE Gold MSCI EAFE Global IG REITS S&P 500 Global HY MSCI EAFE REITS Global IG MSCI EAFE MSCI EM Gold Global HY Commodities Global IG MSCI EAFE US Treasuries Global HY
6.2% 3.1% 11.6% 30.1% 20.7% 14.0% 23.2% 11.6% -8.3% 31.7% 15.1% 2.6% 17.9% 0.7% 3.2% -0.8% 11.2% 12.9% -3.3% 20.1% 10.3% 11.9% -12.9% 3.1%
Global IG Gold Cash Global HY Global HY REITS S&P 500 US Treasuries Global HY S&P 500 Global HY S&P 500 S&P 500 Global IG Gold REITS Gold REITS Global IG MSCI EM MSCI EAFE Global HY Global HY MSCI EM
3.1% -0.7% 1.8% 30.7% 12.4% 10.7% 15.8% 9.1% -27.9% 26.5% 13.9% 2.1% 16.0% 0.1% 0.1% -3.4% 8.6% 11.5% -3.4% 18.6% 8.4% 1.4% -13.2% 2.4%
Gold MSCI EM Global HY S&P 500 S&P 500 S&P 500 Global HY Global IG S&P 500 Commodities Commodities Cash Global IG Cash Cash Global IG Global IG Global HY REITS Gold US Treasuries Cash MSCI EAFE Global IG
-5.4% -2.4% -1.1% 28.7% 10.9% 4.9% 13.5% 7.3% -37.0% 26.1% 13.3% 0.1% 11.1% 0.1% 0.0% -3.8% 4.3% 10.2% -3.9% 17.9% 8.2% 0.0% -13.9% 2.1%
Global HY REITS REITS Gold Global IG Cash Global IG S&P 500 Commodities Gold MSCI EAFE Commodities Gold Commodities Global HY Global HY REITS Global IG S&P 500 Global HY Global HY MSCI EM Global IG US Treasuries
-5.8% -7.8% -2.4% 19.9% 9.4% 3.1% 7.2% 5.5% -42.6% 25.0% 8.2% -2.6% 8.3% -2.1% -0.1% -4.2% 1.3% 9.3% -4.3% 13.7% 8.0% -2.3% -16.7% 1.7%
S&P 500 S&P 500 MSCI EM Global IG Gold US Treasuries Cash Cash MSCI EAFE Global IG Global IG REITS US Treasuries MSCI EM MSCI EM Gold US Treasuries Commodities Commodities Global IG Cash US Treasuries S&P 500 Cash
-9.1% -11.9% -6.0% 14.5% 4.6% 2.8% 4.9% 5.0% -43.1% 19.2% 6.0% -9.4% 2.2% -2.3% -1.8% -10.4% 1.1% 7.6% -13.1% 11.4% 0.5% -2.4% -18.1% 1.7%
MSCI EAFE MSCI EAFE MSCI EAFE US Treasuries US Treasuries Global HY US Treasuries Global HY REITS Cash US Treasuries MSCI EAFE Cash US Treasuries MSCI EAFE MSCI EM MSCI EAFE US Treasuries MSCI EAFE US Treasuries REITS Global IG MSCI EM REITS
-14.0% -21.2% -15.7% 2.3% 3.5% 1.5% 3.1% 3.0% -50.2% 0.2% 5.9% -11.7% 0.1% -3.3% -4.5% -14.9% 1.0% 2.4% -13.2% 7.0% -4.4% -3.0% -19.8% -3.5%
MSCI EM Commodities S&P 500 Cash Cash Global IG Commodities REITS MSCI EM US Treasuries Cash MSCI EM Commodities Gold Commodities Commodities Cash Cash MSCI EM Cash Commodities Gold REITS Commodities
-30.6% -21.4% -22.1% 1.1% 1.3% -3.0% -0.2% -10.0% -53.2% -3.7% 0.1% -18.2% -0.3% -27.3% -29.3% -29.4% 0.3% 0.8% -14.3% 2.2% -15.0% -4.1% -25.2% -7.5%
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Accessible Version Buy when net 88% of markets in MSCI ACWI trading below 200-day moving &
50-day moving averages
BofA Global Flow Trading Rule Contrarian 0.3% Neutral 8 weeks
Buy when outflows from global equities & HY > 1.0% AUM over 4wks; Sell when
inflows > 1.0% AUM over 4wks
BofA EM Flow Trading Rule Contrarian 0.6% Neutral 8 weeks
Buy when outflows from EM equities > 3.0% of AUM; Sell when inflows > 1.5%
of AUM over 4 wks
Macro
EPS growth
BofA Global EPS Growth Model Macro -16% 6-12 months
declining
Model indicates trend in year-on-year change in 12-month forward global EPS
growth.
Source: BofA Global Investment Strategy/ For a guide to our trading models
Chart 20: BofA Bull & Bear Indicator Table 4: BofA B&B Indicator Chart 21: BofA Bull & Bear Indicator
Stays at 3.5 BofA Bull & Bear current component BofA Bull & Bear Indicator since 2002
Disclaimer: The indicators identified above as the BofA Bull & Bear Indicator, MVP Model, BofA Global Breadth Rule, BofA EM Flow Trading Rule, BofA Global Flow Trading Rule, BofA
Global FMS Macro Indicator, BofA Global FMS Cash Rule, Global Wave, Sell-Side Indicator, and Global Financial Stress Indicator are intended to be indicative metrics only and may not
be used for reference purposes or as a measure of performance for any financial instrument or contract, or otherwise relied upon by third parties for any other purpose, without the
prior written consent of BofA Global Research. These indicators were not created to act as a benchmark.
The analysis of the BofA Bull & Bear Indicator in this report is back-tested and does not represent the actual performance of any account or fund. Back-
tested performance depicts the hypothetical back-tested performance of a particular strategy over the time period indicated. In future periods, market and
economic conditions will differ and the same strategy will not necessarily produce the same results. No representation is being made that any actual
portfolio is likely to have achieved returns similar to those shown herein. In fact, there are frequently sharp differences between back-tested returns and
the actual results realized in the actual management of a portfolio. Back-tested performance results are created by applying an investment strategy or
methodology to historical data and attempts to give an indication as to how a strategy might have performed during a certain period in the past if the
product had been in existence during such time. Back-tested results have inherent limitations including the fact that they are calculated with the full
benefit of hindsight, which allows the security selection methodology to be adjusted to maximize the returns. Further, the results shown do not reflect
actual trading or the impact that material economic and market factors might have had on a portfolio manager's decision-making under actual
circumstances. Back-tested returns do not reflect advisory fees, trading costs, or other fees or expenses.
Table 6: The Overbought & Oversold
Ranked deviation from 200-day moving averages in US dollar terms
Acronyms
FMS - Fund Manager Survey
QE - Quantitative Easing
QT - Quantitative Tightening
S&L - Savings & Loan
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Trading ideas and investment strategies discussed herein may give rise to significant risk and are not suitable for all investors. Investors
should have experience in relevant markets and the financial resources to absorb any losses arising from applying these ideas or
strategies.
>> Employed by a non-US affiliate of BofAS and is not registered/qualified as a research analyst under the FINRA rules.
Refer to "Other Important Disclosures" for information on certain BofA Securities entities that take responsibility for the information
herein in particular jurisdictions.
BofA Securities does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a
single factor in making their investment decision.
Disclosures
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