The more the Fed "panics," the more stable U.S. Treasuries become? Bank of America’s Hartnett: Waller may be forced to raise rates to curb the surge in long-term bond yields.

The more the Fed "panics," the more stable U.S. Treasuries become? Bank of America’s Hartnett: Waller may be forced to raise rates to curb the surge in long-term bond yields.

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U.S. long-term Treasury yields continue to climb, putting pressure on the bond market. The Chief Strategist of Bank of America believes that a "panic rate hike" may be just the remedy the bond market needs.

The real yield on the 30-year U.S. Treasury has risen to 3%, the highest level since the global financial crisis in November 2008. Bank of America Chief Investment Strategist Michael Hartnett pointed out in his latest strategy report that the new Federal Reserve Chair, Walsh, may need to stabilize the long-term yield curve through a rate hike.

Currently, the market estimates a 38% chance of a rate hike at the Fed’s next meeting, and the expectation of a rate hike at the September 16 meeting has been fully priced in.

However, this outlook faces political constraints. Hartnett pointed out that prior to the midterm elections in November, whether the “stock market-friendly” Trump administration is willing to tolerate rate hikes that hit the brakes on the stock market remains a core variable.

The tightening of financial conditions is already underway—so far this year, 23 central banks worldwide have raised interest rates. Bank of America expects another 18 rate hikes before the end of the year. Meanwhile, the continued expansion of AI capital expenditures is turning cash flow negative for a large number of S&P 500 components, implying future stock buybacks will shrink accordingly.

Currently, Hartnett recommends investors shift to defensive sectors and long-duration assets, while avoiding bank, technology, and industrial stocks.

Long-term Real Yields Hit Sixteen-Year High, Bond Market Pressure Builds

The rise of the 30-year U.S. Treasury real yield to 3% not only directly reflects tightening financial conditions, but also systematically pressures risk asset valuations.

Hartnett believes that to shift the market's focus from the negative effects of tightening to the positive factors of profit growth, the Fed under Walsh needs to take action by hiking rates.

Walsh has already abandoned the Fed’s forward guidance. Hartnett points out that the current inflation environment does not support a wait-and-see approach: CPI annual growth remains in the 3%–4% range, and the labor market shows no signs of an AI shock.

Political Pressure Is the Biggest Obstacle to Rate Hikes, Tightening Is a Done Deal

Hartnett stated bluntly that regardless of how Walsh and the government negotiate, the trend of financial tightening cannot be avoided.

So far this year, central banks worldwide have had 23 rate hikes, and Bank of America expects another 18 by year-end. Against this backdrop, the probability that Walsh will be forced to respond to bond market pressures is rising, though the “stock market-friendly” policy stance may complicate the timing of rate hikes.

Current market pricing indicates a 38% chance of a Fed rate hike at the next meeting, but by September 16 this has already been fully priced in.

This distribution of expectations reflects the market’s internal contradiction regarding policy: concerns about persistent inflation and rising yields, versus worries that policy tightening will shock the stock market.

The Parallel Trend of Rising Yields and Bank Stocks May Reverse, Triggering Risk Asset Deleveraging

Hartnett pointed out that recently, the market has seen a parallel rise in bond yields and bank stocks, but he warns this relationship could reverse—higher yields may suppress bank stocks, triggering a wave of broad deleveraging across risk assets.

For this, he believes the U.S. dollar is the best hedging tool. In theory, higher interest rates widen the yield spread between the U.S. and other markets, attracting capital inflows into U.S. Treasuries, supporting dollar strength.

Semiconductor stocks have fallen more than 20% from their highs in June. Hartnett regards companies such as Texas Instruments, Analog Devices, NXP, Microchip, ON Semiconductor, and STMicroelectronics as “blue-collar” semiconductor firms and leading indicators of the industrial cycle—specifically, bellwethers for the AI industry cycle.

Based on the above, Hartnett and his team—Jessica Guo, Anya Shelekhin, and Myung-Jee Jung—advise increasing exposure to defensive sectors, dividend assets, and long-duration bonds, while underweighting banks, brokerages, technology, and industrial sectors.

Risk Warning and DisclaimerMarkets are risky, and investing should be done cautiously. This article does not constitute personal investment advice and does not take into account individual users’ special investment objectives, financial status, or needs. Users should consider whether any opinions, views, or conclusions in this article fit their specific situation. Investing based on this is at one’s own risk. ```