Bank of America strategist Savita Subramanian said bonds have become a genuinely competitive alternative to stocks for the first time in decades, pointing to a sharp rise in U.S. Treasury yields and a less favorable setup for equities. She said the 10-year U.S. Treasury yield has moved above 5%, while BofA’s own valuation model suggests the S&P 500’s annualized return over the next 10 years may fail to reach that level. Subramanian also warned that investor sentiment is currently elevated, leaving stocks more exposed to negative surprises and with less room for upside that exceeds expectations. She added that U.S. policymakers are trying to prevent long-term rates from rising too far, with both the Federal Reserve and the U.S. Treasury secretary closely watching moves at the long end of the yield curve. In her view, demographic changes may keep the ceiling for U.S. interest rates below levels seen in the 1970s and 1980s, while artificial intelligence could bring some disinflationary effects that ease long-term inflation and rate pressure. Against that backdrop, she said the case for holding bonds is improving because Treasury yields may struggle to remain above 6% to 7%.
According to BlockBeats, Bank of America U.S. equity and quantitative strategy head Savita Subramanian said on Oct. 7 that bonds have, for the first time in decades, become a truly competitive alternative to stocks.
She also warned that investor sentiment is currently high, leaving the stock market more vulnerable to negative surprises while limiting the room for gains that materially exceed expectations.
The 10-year Treasury yield is above 5%
Subramanian said the yield on the 10-year U.S. Treasury has already climbed above 5%. Based on BofA’s own valuation model, the S&P 500’s annualized return over the next 10 years may not reach that level.
Policymakers are watching the long end
She said U.S. policymakers are trying to avoid an excessive rise in long-term interest rates. Both the Federal Reserve and the U.S. Treasury secretary are closely monitoring changes at the long end of the yield curve.
Demographics and AI may cap rates
Subramanian said demographic shifts mean the upper bound for U.S. interest rates may be lower than it was in the 1970s and 1980s.
She added that artificial intelligence could bring some disinflationary effects over time, easing pressure from long-term inflation and interest rates.
Bonds may be in a better allocation position
Against that backdrop, Subramanian said the environment for allocating to bonds is becoming more favorable because U.S. Treasury yields may find it difficult to stay above 6% to 7% on a sustained basis.
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