U.S. Treasury yields are "running hot": How will rising long-end rates impact the crowded trades in tech and banking?

Original Report: BofA Global Research "The Flow Show: Bonds Bringing the Heat," July 23, 2026

Authors: Michael Hartnett, Anya Shelekhin, Myung-Jee Jung, Jessica Guo

Translation and Editing: DaiDai, Frank, MSX Maitong

Key Takeaways

• The US 30-year Treasury yield has risen to 5.2%, with real yields at 3%. Long-end rates are replacing corporate earnings as the core variable influencing risk assets;
• Tech and financial funds saw inflows of $52.8 billion and $8.8 billion respectively over the past four weeks. Capital is still entering the market, but crowding in trades has increased significantly;
• The most critical confirmation signal is not just whether yields continue to rise, but whether bank stocks can continue to benefit from high interest rates;
• If yields rise while bank stocks turn lower, it implies high rates may be shifting from a "signal of economic strength" to "pressure from tightening financial conditions";
• BofA is not outright bearish on stocks, but rather suggests the market may gradually rotate from high-beta, cyclical, and crowded trades toward defensives, dividends, the US dollar, and duration assets that could benefit from cooling growth;

Recently, the stock market and the bond market have begun to offer two somewhat different answers.

The stock market continues to discuss corporate earnings, AI investment, and economic resilience, while the bond market is worried that if inflation doesn't come down and the fiscal deficit remains unchecked, the Fed may have to hike rates again. Can current asset prices withstand higher funding costs?

This is precisely the question the latest edition of Bank of America's "The Flow Show" attempts to answer.

As of the report's release, the US 30-year Treasury yield had risen to 5.2%, the highest since June 2007; the 30-year real yield reached 3%, the highest level since November 2008. Meanwhile, long-duration bond prices continued to fall, dragging US tech corporate bond prices to two-year lows.

The report succinctly summarizes the current environment: FCI > EPS.

In other words, changes in financial conditions are becoming more important than marginal changes in corporate earnings.

This doesn't mean US earnings have deteriorated. On the contrary, BofA's global earnings model still projects global EPS growth of approximately 9% over the next 12 months. Therefore, the real question is whether current valuations, positioning, and funding costs can maintain the previous balance even as earnings continue to grow.

This forms the most important logical chain of the entire report:

Rising long-end yields tighten financial conditions; tighter financial conditions reinforce expectations of Fed rate hikes or a hawkish policy stance; once bank stocks can no longer benefit from high rates but instead decline alongside rising yields, the market may begin to deleverage and reduce risk exposure, ultimately triggering a repricing of crowded trades in tech, financials, and industrials.

1. What Is This Report Really Trying to Convey?

Over the past few years, whenever US stocks faced rising interest rates, the market attempted to absorb the pressure through earnings growth.

The logic is straightforward: as long as the economy is strong enough, tech companies can still deliver growth, and high rates haven't significantly hurt credit or consumption, investors are willing to believe that US stocks can continue to find a balance between higher valuations and higher risk-free rates.

But this time, the bond market is challenging that logic.

Before the report's release, the market had already priced in roughly a 38% probability of a Fed rate hike on July 29, and had largely priced in another hike before September 16. Yet in the July global fund manager survey, 83% of respondents had originally believed the Fed would not hike before the US midterm elections.

This indicates a clear divergence between stock investors and bond investors in their assessment of the future policy path.

The stock market is still trading earnings growth, AI investment, and economic prosperity; the bond market is beginning to worry that with inflation still hovering at 3%–4%, the labor market not yet significantly disrupted by AI, and fiscal deficits and Treasury supply continuing to expand, the Fed may be forced to tighten policy again.

This is the true meaning of the report's title, "Bonds Bringing the Heat" — bond yields are running hot, transmitting higher funding costs to equities, credit, and the real economy.

The reasons are not hard to understand. Rising long-end yields affect the market through multiple channels:

• First, they directly raise corporate financing costs. Whether issuing bonds, conducting M&A, or expanding capital expenditures, higher rates raise the bar for capital;
• Second, they lift the discount rate used in equity valuations. Especially for tech companies whose profits are more concentrated in the future, even without earnings downgrades, higher real rates reduce the multiple the market is willing to pay;
• Finally, they increase government interest payments, heightening fiscal dependence on bond supply, which in turn puts upward pressure on long-end yields;

BofA believes this pressure is not entirely driven by short-term policy changes, but is tied to deeper supply-side dynamics of the 2020s.

Compared to the 2010s, which were dominated by globalization, demand-driven growth, and low inflation, the 2020s are gradually shifting toward a more supply-driven market: labor supply is constrained by immigration policies, goods supply is affected by tariffs and protectionism, energy supply is vulnerable to geopolitical disruptions, while government bond supply continues to expand.

The US government still runs an annual fiscal deficit of nearly $2 trillion, with annual interest payments of approximately $1 trillion. Even with increased tariff revenue, it is difficult to fundamentally change the fiscal structure.

Therefore, long-end rates face not only Fed policy changes but also structural pressures from fiscal deficits, bond issuance supply, and supply-side inflation.

However, this does not mean long-end rates will rise indefinitely, nor does it mean US stocks are necessarily headed for a bear market. A more accurate interpretation is that the market has historically interpreted high rates as "the economy is strong enough," but once rates reach higher levels, they gradually begin to constrain the economy and risk appetite in turn.

High rates can be both a result of a strong economy and a source of pressure on it.

The dividing line between these two states is most likely to first manifest in bank stocks.

2. Bank Stocks as the Confirmation Indicator, Industrial Semiconductors as the Vanguard

Rising yields alone do not necessarily mean risk assets are destined to weaken.

In a normal reflation or economic boom trade, rising long-end yields typically signal improved growth expectations and a steeper yield curve. In this scenario, banks can earn higher interest income from rising asset-side yields, so bank stocks often rise in tandem with bond yields.

In other words, at this point, the market is normally trading "rising yields → improved economic expectations → bank earnings benefit → bank stocks rise."

What truly warrants attention is whether the relationship between bank stocks and bond yields begins to invert — that is, whether it shifts to "yields continue to rise → funding and liability costs increase → credit and balance sheet pressure builds → bank stocks fall."

Once the market transitions from "rising yields, rising bank stocks" to "higher yields, weaker bank stocks," the implications change significantly.

At that point, investors no longer interpret high rates simply as a sign of economic strength, but begin to worry about higher deposit costs, funding pressure, unrealized losses on securities portfolios, commercial real estate risks, and deteriorating credit quality.

Bank stocks would transform from beneficiaries of high rates into bearers of tightening financial conditions. BofA views this relationship shift as a key confirmation signal for risk asset deleveraging.

Because banks are not just an ordinary stock sector — they connect credit creation, balance sheet expansion, and market liquidity. When bank stocks can no longer benefit from rising yields, it often signals that high rates have approached or crossed the tipping point from growth signal to financial stress.

But before this signal truly emerges, the market may still absorb rate pressure through earnings growth, sector rotation, and policy expectation adjustments. Therefore, the significance of bank stocks lies not in prematurely declaring a market top, but in helping investors distinguish whether current high rates are still reflecting economic resilience or have begun to damage the financial system.

Another leading signal worth watching comes from industrial semiconductors.

The "blue-collar semiconductor" index, comprising companies such as Texas Instruments, Analog Devices, NXP, Microchip, ON Semiconductor, STMicroelectronics, Infineon, and Monolithic Power, has fallen approximately 21% from its June high.

Unlike AI chip companies such as Nvidia, these companies' products are more broadly used in autos, industrial equipment, energy, communications, and manufacturing. They are therefore often viewed as leading indicators of the industrial cycle and real economy demand. The blue-collar semiconductor index entering a technical bear market first suggests that, at least along the industrial chain, market divergence is beginning to emerge.

Notably, over the four weeks of July, tech funds saw cumulative inflows of $52.8 billion, a record high; financial funds saw inflows of $8.8 billion, the largest since January 2022; and industrials remained among the most significantly overweighted sectors by investors since 2021.

Sustained capital inflows indicate the market still has confidence in these areas. But the higher the concentration of capital, the more sensitive the market becomes to changes in expectations. When positioning, narrative, and valuations all concentrate in a few sectors, even without fundamental deterioration, marginal changes in rates, policy, or fund flows can trigger larger price swings.

BofA's Bull & Bear indicator currently stands at 9.6, well above the 8.0 contrarian sell threshold; the global fund manager cash level has also fallen to 3.6%, below the 4.0% sell threshold.

This means the market is not lacking optimistic consensus — one could even say optimism has become the mainstream consensus. What warrants attention is that when investor positioning is high and cash levels are low, the market's near-term capacity to absorb unexpected shocks diminishes.

Overall, this is best understood as a market thermometer: when positioning, fund flows, and sentiment are simultaneously elevated, the market may transition from a one-way rally phase to a stage demanding higher standards for earnings quality, valuation levels, and capital structure.

3. Rotating from Crowded Trades to More Balanced Allocations

It should be emphasized that BofA has not simply concluded "sell everything and turn bearish."

What the report truly expresses is a market style rotation — namely, a gradual shift from high-beta, cyclical assets dependent on valuation expansion and economic boom expectations, toward defensives, dividends, the US dollar, and duration assets that could benefit from cooling growth.

Within its tactical framework, BofA recommends going long defensives, dividends, the US dollar, and duration, while reducing exposure to crowded areas such as banks, brokers, tech, and industrials.

The key point here is not simply judging which assets will rise or fall, but controlling a portfolio's dependence on any single macro scenario.

If the market continues to see strong growth, earnings expansion, and rising risk appetite, then tech, financials, and industrials may continue to perform on fundamentals. But if long-end rates rise further and financial conditions continue to tighten, assets with high valuations, high positioning, and high cyclical sensitivity may experience more pronounced volatility.

Therefore, BofA's advice is essentially a rebalancing — maintaining exposure to growth assets while adding assets that hedge against changes in rates, policy, and economic expectations.

The most easily misunderstood recommendation is "long duration." This does not mean unconditionally buying long-dated Treasuries while long-end yields are still rising and bond supply pressure has not yet eased.

More precisely, this is a trading logic that may unfold in two phases:

• Phase one: inflation, fiscal supply, and rate hike expectations push long-end yields higher, and long-duration bond prices continue to face pressure;
• Phase two: if excessively high rates eventually hurt the economy, banks, and risk appetite, and boom expectations begin to cool, with the Fed shifting toward stabilizing long-end rates, duration assets would gain greater rebound elasticity;

In other words, BofA is not betting that bonds have already bottomed, but rather betting that the longer high rates persist, the higher the probability that they themselves create the conditions for growth cooling and policy reversal.

The US dollar is a more direct hedge within this framework. If the Fed's stance proves more hawkish than the market expects, rate differentials and safe-haven demand could both continue to support the dollar.

Meanwhile, global capital flows are showing signs of rebalancing from the US toward Asia and emerging markets. In the week of the report's release, emerging market equity funds saw inflows of $29.6 billion, near the second-highest on record; China equity inflows reached $21.3 billion, the third-highest ever; and Korea saw cumulative inflows of $16.3 billion over the past four weeks, setting a record.

But structural optimism and short-term chasing are not the same thing. When China, Korea, tech, and emerging markets simultaneously experience extreme capital inflows, short-term trading can also become crowded. The long-term re-rating logic for Asian assets can remain valid, but after a massive influx of capital, prices become more vulnerable to shifts in the dollar, rates, and policy expectations.

Final Thoughts

This report does not declare that US stocks are about to enter a bear market.

Corporate earnings are still growing, AI investment is still expanding, and global capital has not broadly fled risk assets.

It's simply that long-end rates themselves act like a thermometer, reminding the market that financial conditions are heating up and that close attention must be paid to whether this pressure will further transmit to banks, credit, and corporate earnings.

Moreover, even if financial conditions continue to tighten, the market does not necessarily face only one outcome of broad decline. More likely, capital will gradually rotate from overvalued, overweighted areas toward assets with more certain earnings, more stable cash flows, and more reasonable valuations.

We therefore need to see where the heat is being transmitted, and before the market completes its new round of pricing, rebalance the ratio of risk to opportunity.