Bank of America analysts say current interest-rate levels appear overstretched even as the ongoing oil supply disruption has echoes of the 1973 and 1979 shocks that previously saw duration rally over three- and six-month windows.
The bank's assessment centers on heightened geopolitical tension around the near-closure of the Strait of Hormuz, a development it says draws clear parallels to the oil-supply disturbances in 1973 and 1979. In its FX and Rates Sentiment Survey, 64% of respondents indicated they expect oil prices to average above $90 over the next three to six months.
Despite similarities with the 1970s oil shocks, BofA notes a striking difference in market reaction now - rates have sold off across the curve in response to inflationary pressures. By contrast, the bank highlights that the S&P 500 rallied in 1979 and that, in historical wartime oil shocks where duration moved higher, equities generally traded higher over three- and six-month horizons.
Positioning data compiled by the bank points to investors selling across the yield curve, with overall positioning lighter than in past episodes. Against that backdrop, BofA recommends tactical purchases in specific instruments:
- Buy SOFR M8 futures in the U.S. front end - the bank sees rates there as particularly elevated relative to their paths during past price spikes since 1988.
- In the long end, favor 10-year Australian government bonds and 10-year German Bunds.
BofA places these recommendations within a broader historical context for oil shocks since Brent futures began trading in 1988. It observes that oil price spikes tied to wars have often been brief - half of such shocks lasted fewer than 26 weeks. The surge associated with the first Gulf War, for example, concluded after 25 weeks.
The bank also points to recent equity behavior: U.S. stock performance has been below average for the past 10 weeks in which oil has traded above its 52-week moving average, a pattern that may be relevant for investors monitoring commodity-driven volatility and its correlation with equities.
Overall, the bank's view combines a recognition of the oil market's present tightness and the potential for elevated energy prices with a technical assessment of rate positioning that leads it to recommend particular trades across the curve. The analysis emphasizes that, even amid supply shocks echoing the 1970s, current rate moves and investor positioning differ materially from that era.
Note: The article presents the bank's survey results, positioning data, and market recommendations as reported by the bank.