On Monday, Bank of America's Chief Investment Strategist Michael Hartnett warned in his latest report that Wall Street institutions are quietly allocating to safe-haven assets like gold and cryptocurrencies, betting that central banks will be forced to implement yield curve control (YCC) policies to stabilize bond markets.

Hartnett draws parallels between the current market environment and the Nixon era of 1970-1974, anticipating that the Federal Reserve will face enormous political pressure to implement accommodative policies to create pre-election prosperity. He recommends investors go long on gold, bonds, and small-cap stocks to prepare for the upcoming YCC policy.

Bank of America's report indicates that the next major trend in bond yields will be downward rather than upward, with 54% of investors expecting central banks to adopt yield curve control and other price keeping operations (PKO) to address disorderly rising debt costs. This policy shift could trigger a new wave of enthusiasm for risk assets, particularly in gold and cryptocurrency markets.

Currently, global bond markets are experiencing their worst selloff since 1998, with UK long-term gilt yields soaring to 5.6%, hitting their highest level since 1998, while U.S. 30-year Treasury yields approach the 5% threshold. Risk assets have yet to show contagion effects, with high-yield bond credit spreads maintaining 320 basis points, well below the 400 basis point warning line. Japanese, French, and UK bank stocks remain stable, indicating the market is digesting expectations of central bank intervention.

**Bond Market Crisis Spreads, Governments Face Trust Crisis**

Long-term government bond yields in major economies have reached multi-year highs, reflecting bond investors' deep concerns about government fiscal conditions. UK long-term gilt yields rose to 5.6%, the highest level since 1998; France reached 4.4%, a new high since 2009; Japan climbed to 3.2%, touching peaks not seen since 1999.

Behind the bond selloff lies investor skepticism about governments' governing capabilities. UK Prime Minister Starmer's approval rating plummeted to 11%, the lowest since Truss; French President Macron's support fell to 19%, the worst performance since 2016; Japan's Liberal Democratic Party approval rating stands at just 24%, also hitting a low since 2012.

Over the past 18 months, 32 out of 43 global elections have resulted in incumbent government defeats, with bond investors preemptively pricing in fiscal risks from potential populist policies. Hartnett notes that bond markets are precisely targeting the most vulnerable and unpopular governments.

**Central Bank Intervention Expectations Support Risk Assets**

Historical data shows that when bond yields rise, credit spreads widen, and bank stocks decline, it typically triggers stock market corrections exceeding 10%. However, the current situation is different—high-yield bond credit spreads remain at 320 basis points, while Japanese, French, and UK bank stocks perform stably, indicating market expectations of central bank intervention.

Hartnett believes the next round of bond yields will decline significantly rather than rise. When policymakers face disorderly rising government debt costs, they typically adopt price keeping operations, including Operation Twist, quantitative easing, and yield curve control measures. Bank of America's Global Fund Manager Survey shows 54% of investors expect YCC policies to emerge.

The Federal Reserve faces enormous political pressure to cut rates, while weak U.S. economic data provides reasonable justification for rate cuts. July construction spending declined 2.8% year-over-year, home prices fell for four consecutive months, JOLTS employment data supports Fed rate cuts, and AI technology is beginning to impact job markets.

**Nixon Model Replay: Monetary Easing Under Political Pressure**

Hartnett compares the current situation to the Nixon era of 1970-1974, considering it the best reference for understanding policy volatility, central bank tolerance of rising inflation, and dollar devaluation. The 1970s faced multiple challenges including protectionism, monetary instability, and massive budget deficits, with ultimate winners being small-cap stocks, value stocks, commodities, and real estate.

Policy characteristics of Nixon's first term from 1969-1973 included:

Geopolitical realignment, trade wars, pro-cyclical fiscal and monetary policies, dollar devaluation, and Fed politicization. To create pre-election prosperity, the government significantly loosened financial conditions from 1970-1972, with federal funds rates falling from 9% to 3%, U.S. Treasury yields dropping from 8% to 5%, and the dollar depreciating 10%.

Stock markets rose over 60% during this period, led by "Nifty Fifty" concept stocks, growth stocks, energy, and consumer sectors. However, this boom ended in a major collapse during 1973-1974, with inflation surging from 3% to 12%, price controls failing, the Fed forced into aggressive rate hikes, and stock markets plunging 45%.

Bank of America states that unless a second wave of inflation and/or negative nonfarm payroll data causes U.S. deficits to jump from 7% to over 10% of GDP/debt default concerns, U.S. bond yields will trend toward 4% rather than 6%. This would support stock market breadth expansion through structurally unloved long-duration sectors such as small-caps, REITs, and biotechnology. Additionally, they continue to favor gold and cryptocurrencies while shorting the dollar until the U.S. commits to implementing YCC.

**"Invisible Hand" Turns to "Visible Fist"**

While Trump has not explicitly announced price control measures for 2025, the trend of U.S. government intervention in the economy and markets for political purposes is clearly rising. Trump understands that a second wave of inflation would be unpopular before midterm elections, thus adopting subtle methods to control prices and increase supply.

In energy, pursuing "drill baby drill" deregulation and Ukraine peace efforts has led to energy stocks declining 3% since the election; in healthcare, signing executive orders to reduce U.S. drug prices to "most favored nation" levels resulted in healthcare stocks falling 8%; in housing, declaring a "national housing emergency" to improve affordability through increased supply caused homebuilders to drop 2%.

Markets continue to cooperate with Trump's political agenda by shorting "inflation-boosting" sectors. Utilities become the next vulnerable target, with Trump promising to halve electricity prices within 12 months, while the Energy Secretary is most concerned about AI-driven electricity price surges.

Bank of America believes this trend may continue as long as Trump's approval rating remains above 45%, but could end unfavorably if support falls below 40%.

**Asian Investor Perspectives: YCC Expectations and Tail Risk Mitigation**

Hartnett's recent research in Tokyo and Singapore shows that Japanese domestic investors are less bearish on Japanese government bonds than foreign investors. Japan's cyclical deficit is under control, the central bank is slowly raising rates, and the Ministry of Finance is happy to use debt concerns to resist political pressure for consumption tax reductions.

Japanese investors are more concerned about the combination of a "behind-the-curve central bank" and a "behind-the-curve Fed" potentially causing disorderly yen appreciation. Many Tokyo investors expect the U.S. to eventually resort to YCC policies. Questions about trade tariffs are rare, with Japanese investors willing to "pay for admission" to enter U.S. markets.

Singapore investors believe Trump's policy shift toward lower tariffs, taxes, and interest rates has significantly reduced global tail risks. They are less bearish on the dollar than European investors, cautiously going long on a global equity portfolio of U.S./China tech and Japanese/European banks, believing only an economic recession could break the risk asset trend.