Hartnett argues that the bond market is becoming the biggest threat to the AI bull market. The 30-year U.S. Treasury yield has risen to 5.2% (the highest since 2007), with real yields at 3%. The tightening of financial conditions has surpassed the support from corporate earnings. Meanwhile, credit default swaps (CDS) for hyperscale cloud providers have surged to all-time 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 market.
On July 27, Michael Hartnett, Chief Investment Strategist at Bank of America, issued a warning in his latest Flow Show report: The yield on the 30-year U.S. Treasury bond has risen to 5.2%, its highest level since June 2007, and real yields have hit 3%, the highest since November 2008. 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 judgment is that the pressure in the bond market will not dissipate on its own; instead, it may force the Fed to raise interest rates, which is precisely the outcome the stock market least wants to see. He warns that if the bullish combination of "rising bond yields and rising bank stocks" reverses into "higher yields, more bank stock declines," it could become the fuse for a new round of deleveraging in risk assets.
At the same time, the credit default swaps (CDS) of hyperscale cloud computing companies have risen to all-time highs. Bondholders are voting with their feet, questioning the logic of returns from the AI capital expenditure frenzy.
This warning comes against the backdrop of chip stocks being sold off despite solid earnings reports from Google and Intel. The market's real concern has shifted from "can they make money?" to "who will foot the bill?"—if the bond market no longer provides funding for 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 his report, Hartnett explicitly proposes the core framework of "FCI > EPS," meaning that the impact of tightening financial conditions on the market has surpassed the support provided by corporate earnings.
The nominal yield on the 30-year U.S. Treasury bond has reached 5.2%, the highest since June 2007; the real yield has 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 in the market 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 before the end of the year. More notably, the implied probability of a rate hike at the Fed's July 29 meeting has risen to 38%, while the September 16 meeting has already fully priced in one rate hike. He even throws out a provocative judgment in the report: "Politically, isn't it smarter for the Fed to raise rates this week rather than wait until September?"
Hartnett's logic chain points to a paradoxical outcome: the pressure in the bond market may instead force the Fed to raise rates to stabilize the long-end yield. He believes that the only way to resolve this situation is for the Fed to raise rates to curb the disorderly rise in long-end yields.
However, a rate hike is not good news for the stock market. Hartnett warns that close attention must be paid to whether the bullish combination of "rising yields and rising bank stocks" reverses into "higher yields, more bank stock declines." Once this reversal occurs, it could trigger deleveraging in risk assets. In this scenario, he believes that going long on the U.S. dollar is the best hedge against the Fed's hawkish stance.
He also points out that stock investors have not yet viewed interest rate levels as a threat to the "Anything But Bonds" bull market. However, if a pro-market 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.
Credit Risk at Record Highs for Hyperscale Cloud Providers, AI CapEx Logic Questioned
The most direct manifestation of bond market pressure is the sharp deterioration in credit risk indicators for hyperscale cloud computing companies. According to the report, the credit spreads of the hyperscale cloud provider group have widened significantly, with CDS rising to all-time highs, and the concessions on bond issuance are also expanding.
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 considered benchmark companies for "capital expenditure ROI." Although Google and Intel reported solid earnings 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, the frontier models and memory chip demand that rely heavily on continuous capital investment will face the risk of funding drying up.
Hartnett previously echoed the judgment of Goldman Sachs' top derivatives trader, Brian Garrett, that the real risk for AI stocks lies not within the stock market itself but in the bond market. Garrett has been warning for two consecutive weeks that the pain in the credit market will intensify, and he noted that the S&P 500 index is increasingly failing to represent the performance of typical stocks, with internal divergence (low correlation, high dispersion) intensifying.
Additionally, Hartnett views "blue-collar semiconductors"—including Texas Instruments, Analog Devices, NXP Semiconductors, Microchip Technology, ON Semiconductor, STMicroelectronics, Infineon Technologies, and Monolithic Power Systems—as leading indicators for the industrial cycle. This group has fallen 21% since its peak in June.
Meanwhile, the hyperscale tech giants (MAGS) are struggling to hold the 200-day moving average support level ($65), challenging the widely held "boom" consensus in the market. 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 (recently seeing large inflows), broker-dealer stocks, tech stocks, and industrial stocks, to hedge against a reversal of the "boom" 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 transitioning to AI capital expenditure excess, Fed independence yielding to political compromise, and U.S. exceptionalism evolving toward global rebalancing.
In this context, "supply" rather than "demand" has become the primary driver of macro and markets. This is reflected in three specific aspects: immigration controls compressing labor supply (U.S. jobless claims falling to their lowest since 1969); protectionism and tariffs restricting import supply (the U.S. plans to impose new tariffs on 60 trading partners); and geopolitical disruptions to oil supply (of the approximately 80 billion barrels per day of seaborne oil globally, about 64 billion barrels pass through vulnerable chokepoints like the Strait of Hormuz and the Bab el-Mandeb Strait).
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. Even with $250 billion in tariff revenue over the past 12 months, it 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, while the bank stock index, representing "Main Street," will outperform the broker-dealer and private equity indices 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—these stocks are currently trading at levels seen 30 years ago. He says he will buy on any dips triggered by Fed tightening or a currency crisis related to the Bank of Japan.
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