Only a third of sovereign debt yields more than 1%, which means US Treasurys are highly attractive in the current environment, that’s the key takeaway from a report from Bank of America Merrill Lynch on the current state and outlook for the US economy.

The note, a copy of which has been reviewed by ValueWalk focuses on the US’ improving economic outlook and rate hike timetable for the Federal Reserve.

The Fed stands in contrast to other central banks as it is gearing up for another rate hike by the end of the year. However, the combination of an increasingly dovish stance from other central banks around the world and risk that the market will interpret the hike as a “policy mistake” leads Bank of America’s US economic analysts to conclude that Treasury yields will remain under pressure for the foreseeable future.

Slowdown In US GDP Growth Does Not Mean Recession [CHART]

Nonetheless, as US Treasurys still yield more than the majority of other perceived safe haven assets out there, they remain an attractive asset class for investors.

US GDP growth set to pick up? 

The US economic team at Bank of America believe that US GDP growth for the third quarter will average 2.4%, a forecast which has been revised higher from 1.9% based on the view that companies will undertake inventory restocking after drawing down inventories during the second quarter. Furthermore, the team has upgraded its fourth-quarter growth forecast to 2.7% from 1.7% on the belief that inventory restocking will continue throughout the rest of the year:

“We revise up 3Q GDP growth to 2.4% and 4Q to 2.7% due to inventory restocking. This translates to only 1.5% growth this year. Much of the recent weakness owes to mismanagement of inventories, energy and trade shocks. “Core” GDP growth looks healthy. The shocks are fading, allowing for better headline growth in 2H. This would give the Fed the option for a December hike.” — Bank of America

Based on the new higher forecasts, BoA’s average GDP growth estimate for 2016 is 1.5%, the slowest since the recovery started. Here’s why the bank’s research team has so optimistic that inventory restocking will drive GDP growth in the third quarter:

“The pendulum swung to the extreme and the economy is now left with a dearth of inventory. In prior episodes when the change in private inventories (CIPI) has turned negative, there has been a restocking within two quarters. We have followed this pattern and penciled in a slight inventory gain in 3Q, with the bulk of the improvement occurring in 4Q. The risk is that restocking takes even longer in this cycle given the cautious behavior on the part of businesses and producers.” — Bank of America 


After the dismal Q2 GDP print of 1.2%, Bank of America could easily be accused of being overoptimistic in its forecasts. However, BoA isn’t the only outfit that is claiming economic growth will bounce back during the second half.

Donald Trump, Rates & Nominal US GDP To 10-Year Bond Yields

According to the Federal Reserve Bank of Atlanta’s GDP Now forecast model, the US economy is likely to expand at a 3.7% annualised rate in the third quarter, far in excess of the government’s advanced reading of second quarter growth at 1.2%. This figure has been revised up from the reading of 3.6% calculated earlier this week.

US GDP – Still A Bit Of A Soft Patch

The range of Wall Street estimates for the third quarter reading is 1.8% to 2.9%, based on a range of the top ten and bottom ten forecasts.

Atlanta GDP