The sharp rise in US debt fluctuations sounded the alarm! Bank of America Hartnett warns that the risk of deleveraging is heating up, and rising yields are a major threat to the market

The Zhitong Finance App learned that Bank of America strategist Michael Hartnett warned that the recent sharp rise in the volatility of the US bond market is increasing the risk of wider deleveraging in the financial market. At a time when US bonds are being sold off violently, the MOVE index, which measures the expected volatility of the US Treasury bond market, soared by about 35% in just two trading days, indicating that the financial system using US Treasury bonds as collateral is under greater pressure.

Hartnett pointed out in a report released on Friday that if high volatility in the bond market occurs at the same time as a further decline in financial stocks, it may be a signal triggering a wider sell-off of risky assets.

Specifically, he listed two key levels as observational indicators: if the global financial equity-related index falls below 125 while the MOVE index remains above 125, the market may face a more obvious “safe-haven” shock.

The MOVE index soared by about 35% in two days, and the pressure on the US bond market quickly accumulated

The MOVE Index is generally regarded as a “bond market panic index” to measure the expected degree of volatility in the US Treasury bond market. Recently, the price of US Treasury bonds has dropped sharply and yields have risen rapidly, which has clearly increased the volatility of the bond market.

Hartnett believes that it is worth being wary of not only is the yield itself high, but also the speed at which the market is changing. If bond prices fall rapidly, investors using US bonds as collateral and trading with leverage may be forced to lower their positions, thus creating a chain reaction of “falling bond markets — adding margin or reducing leverage — further selling assets.”

This is also the broader risk of deleveraging that Bank of America is concerned about. In fact, in the fund manager survey released by Bank of America earlier this month, “disorderly rise in bond yields” has been viewed by investors as the biggest tail risk in the current market.

Hartnett also proposed another situation worth being wary of: if oil prices fall after the US and Iran reach an agreement, but bond yields continue to rise, this may mean that the driving force for higher yields does not only come from energy inflation, but the market may also enter another safe-haven environment as a result.

Continued upward yield is a major threat to economic prosperity

In Bank of America's benchmark scenario, rising bond yields are still the main market risk facing current economic expansion.

Continued rise in interest rates not only means an increase in government and corporate financing costs, but also boosts borrowing costs such as housing loans, and puts pressure on stock valuations. In particular, in the current environment where the US stock market is highly valued and the weight of AI-related stocks is highly concentrated, the rapid rise in yield may further reduce the valuation space for highly valued assets.

However, Hartnett believes that policymakers may not allow yields and energy prices to rise indefinitely.

Hartnett believes that the importance of the US stock market has reached a level where it is difficult for policy makers to ignore, so once bond yields and oil prices continue to rise and have a clear impact on the market, the government may take measures to contain it, and related policy intervention may eventually put downward pressure on the US dollar.

It is recommended to hold commodities and emerging market assets and wait for the yield to peak

In this market environment, Bank of America advises investors to continue to hold commodities and emerging market assets while looking for investment opportunities that may occur after bond yields peak.

Hartnett believes that once yields peak, a range of interest-sensitive assets, including 30-year US Treasury bonds, ultra-high capitalization technology stocks, small-cap stocks, biotech stocks, and real estate stocks, may all usher in allocation opportunities.

The logic behind this line of thinking is that currently high yields are suppressing longer-term bonds and stock sectors that are sensitive to financing costs. If policy intervention or the easing of inflationary pressure eventually causes yields to stop rising or even falling, these assets, which were previously heavily impacted by interest rates, may be supported again.

“AI Big 10”'s share weight in the US rose to 41%, and market concentration attracted attention

Hartnett also pointed out that the US stock market is currently highly concentrated on a few large AI-related technology companies, which may amplify the impact of the impact of the bond market on the stock market. The “AI Big 10” he defined included the “Big Seven in Technology,” as well as Broadcom (AVGO.US), AMD (AMD.US), and Micron (MU.US). The combined market weight of these companies has reached about 41%.

Bank of America points out that this concentration is roughly close to the extreme level seen in 1973, 1989, and the previous rounds of market highs in 2000. This means that if bond yields continue to rise rapidly, once overvalued AI and technology assets are clearly adjusted, their larger index weight may further amplify overall stock market fluctuations.

Where is the market headed at the end of the year? Bank of America outlines two scenarios: long and short

In addition to the benchmark scenario, Hartnett also listed two extreme market paths that could occur at the end of this year. Under one scenario, if the US political situation creates checks and balances, oil prices fall, and bond yields hit the upper limit, the financial environment may ease, and the AI and consumer-related sectors may continue to perform strongly.

Another scenario involves changes in US policy after the midterm elections. If the election results trigger a repricing of fiscal and policy prospects in the bond market and cause a historic sell-off of US bonds, the highly concentrated US stock market may face a clear shock.

However, these are scenario analyses proposed by Hartnett and are not Bank of America's benchmark predictions. Its core warning still focuses on the bond market. Against the backdrop of the MOVE index soaring sharply in a short period of time and US bond yields continuing to be high, investors need to pay attention to whether fluctuations in the bond market are further transmitted to financial stocks and other risky assets, and eventually evolve into a broader deleveraging market.