High yields, dollar strength to prompt Fed hawkishness, weigh on stocks: BofA

Investing.com -- Investors are rotating into safer assets, with money market funds seeing inflows of $143.2 billion, the largest since April 2020, according to a Bank of America, note citing EPFR Global data.

Treasuries and other defensive assets also drew significant interest during the week ending January 8.

Money market funds dominated weekly flows, followed by $25.6 billion into stock funds and $21.6 billion into bonds. Crypto saw $1.4 billion in inflows, while $500 million exited gold.

Treasuries experienced their biggest inflow since August 2024, drawing $6.2 billion, while bank loans attracted a record $3.1 billion as investors speculated on Federal Reserve rate hikes in 2025.

According to BofA, emerging market (EM) equities saw their largest inflow since October, with $3.5 billion, while the tech sector recorded its first inflow in six weeks, drawing $2.3 billion.

Strategists led by Michael Hartnett suggest that the playbook is based on the expectation that elevated bond yields and a strong US dollar will compel the Federal Reserve to adopt a clearly hawkish stance, putting pressure on equities. This, in turn, could prompt Donald Trump to turn “mellow on tariffs,” strategists said.

They expect to “flip BIG” in February or March, favoring long positions in bonds with 5% yields, international equities—particularly in China, the UK, and emerging markets—and gold.

Strategists prefer this approach “to play a monetary & fiscal "policy panic" in Asia & Europe,” a rebound in Chinese consumer activity, a shift by Trump from tariffs to tax reforms, and geopolitical developments such as US-Iran tensions followed by efforts toward Russia-Ukraine peace.

Regionally, US equities recorded a second consecutive week of inflows, attracting $11.2 billion, while emerging markets saw $3.5 billion. Japan experienced a second week of outflows at $800 million, and Europe extended its streak to 15 weeks of outflows, shedding $100 million.

In fixed income, investment-grade bonds continued their remarkable streak, adding $10.1 billion for a 63rd straight week of inflows. High-yield bonds saw $600 million, marking their first inflow in five weeks. Bank loans drew $3.1 billion for their 14th week of inflows, while Treasuries saw their third consecutive week of gains, pulling in $6.2 billion.

Source: Investing.com