Bank of America strategist Michael Hartnett warned on Sept. 29 that sharp volatility in the U.S. Treasury market is turning into a fresh source of pressure for risk assets.
Hartnett pointed to the MOVE Index, which rose about 35% in two trading days, saying the funding system that uses Treasuries as core collateral is facing heavier volatility.
BofA sets out a key risk trigger
Hartnett said the market could move into a broader 「risk-off deleveraging」 phase if the iShares Global Financials ETF (IXG) falls below $125 while the MOVE Index remains above 125. In that case, the AI trade would face a tougher test from interest rates.
Higher long-end yields are tightening conditions for risk assets
Large technology companies have been supported by resilient earnings and AI capital spending over the past period, but a continued rise in long-end yields would lift both funding costs and valuation discount rates at the same time.
The 10-year U.S. Treasury yield briefly climbed above 5.2% last week, reaching its highest level since 2007. BofA also said an earlier survey of fund managers showed that a 「disorderly rise in bond yields」 had overtaken an AI bubble as the tail risk that worried markets the most.
The more dangerous mix: high yields and weak financial stocks
Hartnett’s central view is that higher yields on their own do not necessarily end risk appetite. The more dangerous combination is elevated yields alongside weakness in financial stocks.
That would mean rates have shifted from being a signal of economic expansion to becoming a source of tighter liquidity and credit conditions. Leveraged investors would then be forced to cut positions, with pressure potentially spreading from bonds to technology shares, bank stocks and other richly valued assets.
Three signals to watch next
For investors positioned for AI, Hartnett said the next focus will be whether bond volatility can ease, whether bank stocks can stabilize, and whether long-end yields show signs of peaking.
BofA still sees yields as the main potential threat to the current expansion in the economy and equities. If rate pressure eases, large-cap technology stocks could again attract capital.