The last rate hike spawned a new bubble, says Bank of America, and investors should sell stocks instead of buying them

The bank sector crisis, which has already destroyed three regional banks in the United States, has resulted in the emergence of a new bubble.

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Money-market funds, according to Bank of America analysts led by Michael Hartnett, are the newest in-demand investments.

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They note that the assets managed by money funds now reach $5.1 trillion, an increase of nearly $300 billion over the previous four weeks. The highest six-week influx into Treasurys, the largest weekly drain from asset bonds since October 2022, and the largest weekly inflow into cash since March 2020 were also recorded.

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In 2008 and 2020, when assets in money-market funds increased, the Federal Reserve cut interest rates. According to Hartnett, "markets stop worrying when central banks start panicking," and he pointed out that historically, a spike in emergency Fed rediscounting borrowing has taken place right before a significant stock-market bottom.

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One thing is different this time around: inflation is a serious issue, and labor markets continue to be remarkably robust not just in the United States but across the board for developed nations. This year, there have been 46 interest rate increases, including one by the Swiss National Bank following its last-week rescue of Credit Suisse.

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According to history, the BofA team advises selling the most recent interest rate increase. They claim that the stock and credit markets are "too hungry for rate cuts, not afraid enough of recession." For all, when banks borrow emergency funds from the Fed, they tighten lending rules, which leads to less lending, which in turn causes less optimism among small businesses, which eventually causes a break in the labor market.

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While shares of Deutsche Bank fell in Frankfurt on Friday, bond yields and U.S. stock futures also fell.

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Just under 1% has been added to the S&P 500 this week.