BoA’s Michael Hartnett’s 4 ’C’ Trades for the Post-War Playbook

S&P rebounded 3.5% last week but breadth remains fragile (only 16% of global equities below both 50- and 200-day MAs) while S&P EPS estimates have risen from $310 to $323 YTD. Flows show $11.6bn into equities, $3.3bn into bonds and $0.9bn into gold, versus $7.9bn of combined IG/HY outflows — signaling selective rotation and credit stress. Key market drivers are geopolitics (Iran/oil > $100) and long-end yields near 5%; tactical positioning favors duration (bonds) and fading rallies, though a short Iran conflict would support curve steepeners, commodities and consumer cyclicals.

Analysis

Market internals are signaling a quiet rotation toward duration-sensitive instruments rather than an outright risk-on regime; when pockets of long-duration alpha reassert, it usually precedes a multi-week reweighting out of credit-risk and into nominal duration via both cash and derivatives. That reallocation mechanically tightens credit spreads in the short end while leaving junk and subordinated debt vulnerable to headline-driven repricings, creating asymmetric opportunities across the capital structure.

The AI/datacenter capex cycle is behaving like a late-stage capex binge: it lifts suppliers of power, cooling, and specialty semiconductors while concentrating leverage within a small cohort of issuers and financiers. That concentration increases idiosyncratic credit risk even as aggregate tech equity indices remain bid — a divergence that can be harvested with single-name protection or selectable equity shorts, rather than broad tech exposure.

Political timelines are compressing the volatility surface: short, high-impact windows will produce realized vol spikes that far exceed implied vol in many one- to three-month structures. If geopolitical shocks lengthen, the pathway flips — commodity and inflation repricing would force central banks to recalibrate, steepening or flattening curves in different buckets and rendering many front-run steepener trades vulnerable; position size and time decay must be managed accordingly.

Key Decisions for Investors

• Curve steepener (3–6 months): implement a 2s/10s steepener via short 2Y futures (ZT) and long 10Y futures (ZN) sized to risk 0.5% portfolio loss on a 20bp adverse move. Target 30–70bp steepening for 3–1 payoff; stop-loss if the 2s moves wider vs 10s by 25bp within 6 weeks.
• Long duration hedge (6–12 months): buy ZROZ or a 20–30yr Treasury ETF exposure sized to cap portfolio drawdown to 5% if risk assets fall. Expect 6–12% total return if long yields compress 50–100bp; hedge with a short-dated call if rates rally sharply.
• Select credit hedge on hyperscaler/supplier risk (6–12 months): buy single-name CDS protection or long-dated put spreads on ORCL and MSFT-sized to cover 40–60% of estimated exposure to datacenter capex disruption. Target break-even on a 150–300bp spread widening; predefined max premium loss of 1–2% of portfolio.
• Tactical equity fade (2–4 weeks): sell SPX call spreads into near-term technical resistance (one- to two-week expiries) to monetize compressed call skew ahead of expected headline windows. Aim to collect premium equal to 0.5–1.5% of notional with defined max loss 3–4x premium if market gaps higher.
• Bank/loan barbell (3–6 months): overweight senior bank paper via BAC equity exposure and offset with small allocation to floating-rate bank loan ETF to capture re-stabilizing loan demand. Position size to earn ~4–7% upside if NII normalizes, with stop if systemic funding spreads widen by 50–75bp.