• Bank of America (BAC) strategist Michael Hartnett advises investors to avoid riskier trades until the dollar peaks and bond yields retreat from multidecade highs.
  • The Bloomberg dollar index has risen 3% from its September low as investors rebuild cash and reduce leverage.
  • Hartnett recommends starting to add bonds, while warning that deeper declines in small caps and banks could signal weakening growth optimism and eventually pressure technology stocks.

Rising Yields and Dollar Strength Keep Investors Cautious

A rapidly worsening bond-driven risk-off backdrop is gripping markets, with U.S. long-term yields surging to multidecade highs and the dollar strengthening, according to Bank of America strategist Michael Hartnett. In his latest Flow Show note, Hartnett argues that investors are likely to keep cutting leverage and avoiding risk assets until yields decisively retreat and the dollar tops out. His near-term contrarian call is to begin accumulating high-quality bonds, particularly longer-dated Treasuries, rather than chase equities into tighter financial conditions.

The global bond selloff intensified into October. The U.S. 10-year Treasury yield briefly reached 5.34% on October 1, its highest level since 2002, before easing to roughly 5.25% early October 2. The U.S. dollar index rose to 102.08, a 17-month high, and was on pace for a third straight weekly gain. The immediate driver is no longer only expected short-term Fed policy; market commentary increasingly attributes rising long-end yields to a higher term premium—extra compensation for holding long bonds amid inflation, Treasury-supply, and fiscal-risk concerns.

"What institutional investors like us are really focused on is regulatory stability," Hartnett said, according to people familiar with the matter, though he was referring to the broader macro environment. In late September, stronger-than-expected activity data sharpened the concern that growth and inflation could stay too strong: the flash U.S. composite PMI rose to 58.4, a five-year high, while a $70 billion five-year Treasury auction saw weak demand and its highest auction yield since 2007.

Hartnett has highlighted bond-market volatility as a systemic risk. A 35% two-day MOVE Index increase, combined with weakness in global financial shares, could foreshadow wider forced deleveraging across equities, credit, and other risk assets. The MOVE Index, a measure of Treasury volatility, remains elevated.

Bank of America is one of the largest U.S. banking groups, providing consumer banking, credit cards, mortgages, wealth management, investment banking, trading, lending, and corporate treasury services. This headline concerns BofA Securities’ market strategy research, not a change in Bank of America’s corporate operations, financial results, leadership, or restructuring. Michael Hartnett is BofA’s long-running cross-asset strategist and author of the firm’s “Flow Show” market note.

What to Watch

Hartnett’s framework hinges on several signals: a rising dollar tightens global financial conditions, raises the local-currency burden of dollar debt abroad, and can hurt international risk appetite. Higher long yields pressure stock valuations and raise financing costs for households, companies, banks, and governments. If small caps and banks fall more sharply, that often signals investors are pricing slower growth or tighter lending. And if the MOVE Index stays high while global financials weaken, it may indicate stress in the Treasury collateral and funding system, increasing the risk of forced asset sales.

Conversely, if yields peak and reverse, that would support prices of existing bonds and could eventually help duration-sensitive assets such as large-cap technology, REITs, biotech, and small caps. BofA’s stated “peak yield” opportunities have included 30-year Treasuries, mega-cap technology, small caps, biotech, and real estate. In one scenario, BofA estimated that a 100-basis-point drop in yields over 12 months could produce approximate returns of 10% on five-year Treasuries, 14% on 10-year Treasuries, and 22% on 30-year Treasuries—illustrative estimates, not guarantees.

The Federal Reserve raised its target range by 25 basis points to 3.75%–4.00% on September 16, saying economic activity was expanding at a solid pace, domestic spending remained resilient, investment was robust, and inflation was still elevated. The unanimous decision demonstrates why markets have been reluctant to assume swift rate cuts or a rapid decline in yields. Higher yields affect the economy through several channels: consumers face elevated borrowing costs, corporate refinancing becomes costlier, banks may see unrealized bond losses, and technology stocks are particularly sensitive to discount rates. Reuters reported the Nasdaq fell 1.13% on September 23 as yields jumped, even after the index had reached a record the previous day.

Geopolitics and Fiscal Concerns Add to Inflation Risk

The policy setting is monetary policy, Treasury financing, and geopolitical uncertainty—not a company-specific regulation. The Fed is prioritizing a return of inflation to its 2% objective and has not declared victory on inflation. Its September statement emphasized elevated uncertainty partly related to geopolitics. Investors are demanding more compensation to own longer maturities, reflecting concern about long-duration supply and fiscal risk. Weak demand at Treasury auctions can reinforce the selloff and lift borrowing costs for the federal government, with effects that spread globally because Treasuries anchor international pricing.

Tension surrounding the U.S.–Iran conflict has added an inflation-risk channel via energy prices. Reuters reported U.S. crude near $92.60 a barrel and Brent near $103.50 on September 23 amid uncertainty around diplomatic progress. The anticipated Trump–Xi meeting has put trade, technology, and Iran-related issues in focus. Those relationships matter for supply chains, export controls, commodity demand, currency markets, and global risk sentiment. Hartnett’s alternative stress scenario is especially notable: if oil prices drop on a geopolitical de-escalation but Treasury yields still climb, markets may conclude that the rise in yields reflects structural fiscal and term-premium concerns rather than energy inflation alone.

This episode follows years in which investors grew accustomed to low yields and to bonds acting as a stabilizer when stocks declined. The recent move challenges that relationship. The 10-year Treasury yield’s move above 5% puts it at levels not seen since 2007, while the October 1 intraday move above 5.3% marked the highest level since 2002. Prior precedents include the 2013 “taper tantrum,” the 2022 global bond selloff, and the 2023 regional-bank stress. The difference now is that investors are balancing persistent inflation and resilient activity against rising fiscal/term-premium risk.

Short term, risk appetite is likely to remain fragile as markets await labor-market and inflation data and reassess whether the Fed will tighten further. A weak payrolls report or cooler inflation could bring yields and the dollar down, helping bonds and rate-sensitive stocks. Conversely, another upside inflation or activity surprise could restart the rise in yields and extend pressure on small caps, banks, REITs, high-yield credit, and high-valuation technology. Key indicators to monitor include U.S. 10-year and 30-year Treasury yields, the dollar index, the MOVE Index, global financial stocks and U.S. regional banks, Treasury auction demand, oil prices, inflation data, and Fed communications ahead of its October 27–28 meeting.

Long term, if inflation moderates and growth cools enough to reduce the term premium, long bonds could regain their role as a portfolio hedge and produce significant capital gains from today’s elevated yields. If fiscal concerns, heavy debt issuance, and inflation persistence keep the term premium high, however, the economy may face structurally higher financing costs, tighter credit, more volatile asset prices, and a lower tolerance for richly valued growth equities. Hartnett’s conclusion is conditional, not a guarantee: buying bonds begins to make strategic sense at high yields, but the broader risk-off phase may not be over until the market sees convincing evidence that long-term yields have peaked and dollar strength is reversing.

Correction: An earlier version misstated the date of the Fed’s rate decision. It was September 16, not September 15.