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BofA Global Research: The Flow Show - Investment Strategy Analysis - January 16, 2025

Market Overview

• Current Market Status (YTD 2025):
  • Yields: US 30-year Treasury yield is at 5.5-5.8%, 10-year real rates ~2.5%, T-bill yields ~1.9%.
  • Negative Roll Returns: Historically, 10-year rolling returns on US Treasuries remain the most negative (-0.5%) among all asset classes over the past 90 years.
  • Best Performers: Commodities up 10%, cash ~0.9%, stocks (S&P 500) ~0.3%.
  • Worst Performers: Bonds (UST yields up >100bps), rate-sensitive stocks (e.g., homebuilding).

Key Investment Themes & Recommendations

1. Bonds:

   • Sell-Side View: Deteriorating prospects due to Fed hawkishness (rate cuts priced out), Trump's "smaller government" deficit concerns, and record national debt. BofA recommends shortening duration, reducing bond overweight (UW).
   • Positioning: Medium-longer duration bonds (e.g., 30-year UST) offer better yield/convexity trade if yields fall back to ~4%.
   • Yield Levels: 5% "twin peaks" (Chart 8) may test positioning; 2.5% real rates level also limits bond upside.

2. Stocks:

   • US Stocks: Upside constrained by concentration, valuation, and positioning. If US small-caps (IJR) fail to exceed 2021 highs (Chart 10), asset allocators likely reduce stock OW.
   • International (EU/China/EM): Supportive policies, cheap currencies, lower valuations, and geopolitical shifts (post-WWII/Marshall Plan, post-Cold War) create opportunities.

3. Commodities & Gold:

   • Commodities: Long into rising global PMIs, China money supply, and peak USD; gold-crypto sell-off reversed.
   • Gold-Oil Flipping: Flip Long Gold vs Oil as Russia/Ukraine/Middle East geopolitics shift toward peace.

4. Cash & Liquidity: Focus cash (up to ~4% AUM, Chart 1). Strong credit market technicals support cash levels.

Flow Data & Institutional Insights

• YTD Flows (1/15/2025):
  • Equities: $3bn inflows (ETFs $23bn overall). US large caps lead.
  • Bonds: Steady $11.4bn inflows (11 weeks).
  • Crypto: Significant exit ($0.9bn).
  • Cash: Largest outflow since Apr'24 ($83.5bn drop).
  • Private Clients: Reduced stock OW (GWM equity ~63%), increased T-bill/T-notes ($73bm inflows) due to Fed hawkishness.

BofA Tools & Indicators (B&B, FMS)

• BofA Bull & Bear Indicator at 3.8: Neutral reading, watch for cash levels rising from 3.9% to >4.0% (sell signal).
• FMS Equity- Cash Ratio: Net OW US equities vs Cash at ~49%, highest OW since Jan'22.
• Economic Context: Fed rate cuts likely curtailed due to deficits (US govts ~$7.3tn, 3rd largest economy).

Cross-Asset Long-Term Data Tables (2000-2024)

• Charts highlight historical performance by year and deviation from 200-day moving averages.

Trading Rules & Risk Management

• Back-tested Model: Neutral signals below 3 for market bottoms.
• Overbought/Oversold: Commodities (CNX), FX (SGD), Gold (Chart 7).

End-Year Watch (Jan 2025)

• FMS Release (Jan 21): Monitor cash levels above 4.0% (sell signal) or equity allocation below 25% OW (sober sentiment).
• EM/Global Equities Outflows: Continue but stabilize; long EM on policy easing.

Summary:

• Bonds: Reduce overweight, short duration on hawkish policy shift.
• Stocks: Reduce OW if IJR doesn't lead; international recovery on policy/volatility.
• Gold/Commodities: Long into geopolitical peace/market trends.
• Cash: Build liquidity, warning at 4.0%.
• FX: Momentum plays in USD/SGD/JPY grains weaken; Chinese renminbi vulnerable.

**8 weeks to End Policy.