Hartnett argues that the bond market is becoming the biggest threat to the AI bull run. The 30-year U.S. Treasury yield has risen to 5.2% (the highest since 2007), with real yields reaching 3%. Financial conditions are tightening more than corporate earnings can support. Meanwhile, credit default swaps (CDS) for hyperscalers have hit historical highs, as bondholders question the return logic of AI capital expenditures. If the bond market cuts off funding and forces the Fed to raise rates, it could trigger a new round of deleveraging in risk assets.
The bond market is becoming the most dangerous variable for the AI bull run.
On July 27, Michael Hartnett, Chief Investment Strategist at Bank of America, issued a warning in the latest Flow Show report: The 30-year U.S. Treasury yield has risen to 5.2%, the highest level since June 2007, real yields have hit a peak of 3% since November 2008, and U.S. tech bond prices have fallen to two-year lows—the tightening of financial conditions is now surpassing the support that corporate earnings provide to the market.
Hartnett's core thesis is: The pressure from the bond market will not dissipate on its own; instead, it could force the Fed to raise rates, and that is precisely the outcome the stock market fears most. He warns that if the bullish combination of "rising bond yields and rising bank stocks" flips to "higher yields, lower bank stocks," it could serve as a trigger for a new round of deleveraging in risk assets.
At the same time, credit default swaps (CDS) for hyperscalers have surged to their highest levels ever, as bondholders are voting with their feet, questioning the return logic of the AI capital expenditure frenzy.
The backdrop to this warning is: Despite solid earnings reports from Google and Intel, chip stocks are still being sold off, indicating that the market's real concern has shifted from "can they make money?" to "who will foot the bill?"—if the bond market stops funding the AI feast, where will the money come from for those sky-high memory chips and frontier models with negative returns?
Bond Market Pressure Outweighs Earnings, Financial Conditions Become the Core Variable
In the report, Hartnett clearly outlines the core framework of "FCI > EPS," meaning that the impact of tightening financial conditions (Financial Conditions Index) on the market now exceeds the support provided by corporate earnings (EPS).
The nominal yield on the 30-year U.S. Treasury has reached 5.2%, the highest since June 2007; real yields have risen to 3%, the highest since November 2008; and U.S. tech bond prices have fallen to two-year lows. The combination of these three indicators means that the cost of financing is systematically rising, and this pressure has not yet been fully priced in by stock investors.
Hartnett notes that there have been 23 central bank rate hikes globally so far in 2026, and Bank of America expects 18 more by the end of the year. More notably, the implied probability of a Fed rate hike at the July 29 FOMC meeting has risen to 38%, while the September 16 meeting is fully priced in for a rate hike. He even poses a provocative question in the report:
"Politically, wouldn't it be smarter for the Fed to hike this week rather than wait until September?"
Hartnett's logic chain points to a paradoxical outcome: The pressure from the bond market could actually force the Fed to stabilize long-term rates by raising rates. He believes that resolving this situation can only happen if the Fed raises rates to curb the disorderly rise in long-term yields.
However, rate hikes are not good news for the stock market. Hartnett warns that we need to closely monitor whether the bullish combination of "rising yields, rising bank stocks" flips to "higher yields, lower bank stocks"—if it does, it could trigger deleveraging in risk assets. In this scenario, he sees going long on the U.S. dollar as the best hedge against the Fed's hawkish stance.
He also points out that stock investors have not yet viewed interest rates as a threat to the "Anything But Bonds" bull market. However, if a market-friendly Trump administration tolerates rate hikes to put the brakes on the stock market and anti-billionaire sentiment, the market could face a significant negative shock.
Hyperscaler Credit Risk Hits Record Highs, AI Capex Logic Questioned
The most direct manifestation of bond market pressure is the sharp deterioration in credit risk indicators for hyperscalers. According to the report, credit spreads for the hyperscaler group have widened significantly, CDS has risen to its highest level ever, and yield concessions on bond issuances are also widening.
The root cause of this phenomenon is the market's skepticism about the return on investment (ROI) of AI capital expenditures. Google and Tesla are seen as benchmarks for "capex ROI," and despite solid earnings reports from Google and Intel last week, chip stocks were still sold off. The core question the market is asking is:
If bondholders are no longer willing to pay for the AI feast, frontier models and memory chip demand that rely heavily on continuous capital investment face the risk of funding drying up.
Hartnett previously resonated with the view of Brian Garrett, a top derivatives trader at Goldman Sachs, who believes that the real risk for AI stocks lies not within the stock market but in the bond market. Garrett has been warning for two consecutive weeks that pain in the credit market will intensify, and he noted that the S&P 500 index is increasingly less representative of the performance of ordinary stocks, with market internal divergence (low correlation, high dispersion) intensifying.
Additionally, Hartnett views "blue-collar semiconductors"—including Texas Instruments, Analog Devices, NXP, Microchip, ON Semiconductor, STMicroelectronics, Infineon, and Monolithic Power—as leading indicators for the industrial cycle. This group has fallen 21% from its June high.
Meanwhile, the hyperscale tech giants (MAGS) are struggling to hold support at the 200-day moving average ($65), challenging the widely held "prosperity" consensus. The Bank of America July Fund Manager Survey shows that investor overweighting in industrial stocks is at its highest level since July 2021.
In response to these signals, Hartnett's short-term trading advice is: Go long on defensive stocks, high-dividend stocks, and long-duration bonds; go short on bank stocks (which have seen significant recent inflows), broker-dealer stocks, tech stocks, and industrial stocks, to hedge against a reversal of the "prosperity" expectations.
Bond and Stock Supply Under Dual Pressure, Gold and Bitcoin Quietly Bottoming
From a broader macro perspective, Hartnett characterizes the 2020s as: an era of rising political populism, globalization giving way to national security, fiscal excess shifting to AI capex excess, the Fed's independence yielding to political compromise, and U.S. exceptionalism evolving toward a global rebalancing.
In this context, "supply" rather than "demand" is becoming the main driver of macro and markets. This is reflected in three areas:
Immigration controls are tightening labor supply (U.S. initial jobless claims have fallen to their lowest since 1969); protectionism and tariffs are limiting import supply (the U.S. plans to impose new tariffs on 60 trading partners); and geopolitical disruptions are affecting oil supply (of the approximately 80 billion barrels per day of seaborne oil, about 64 billion barrels pass through vulnerable chokepoints like the Strait of Hormuz and the Bab el-Mandeb).
In contrast, constraints on bond supply and stock supply are loosening. The U.S. government still maintains an annual fiscal deficit of $2 trillion, with annual interest payments of $1 trillion, and even $250 billion in tariff revenue over the past 12 months is insufficient to close the gap. Companies with negative free cash flow are reducing stock buybacks, further compressing support for stock supply.
Against this backdrop, Hartnett believes that gold and bitcoin are quietly bottoming out in 2026, and that the bank stock index, representing "Main Street," will outperform the broker-dealer and private equity index, representing "Wall Street," in the second half of the 2020s.
Additionally, he lists Hong Kong property stocks as one of the most attractive long-term buying opportunities—stocks that are currently trading at the same prices as 30 years ago. He says he will buy on any dips triggered by a Fed tightening or a yen crisis from the Bank of Japan.
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