Michael Hartnett, the veteran strategist at Bank of America known as Wall Street's most accurate strategist, and his team have released a research report stating that risk assets will struggle to escape deleveraging and selling pressure until the dollar's rally shows clear signs of peaking and the surging long-dated Treasury yields driven by energy inflation retreat from historic highs.

The Bloomberg Dollar Index has rebounded about 3% from its September low, reflecting investors reducing holdings in risk assets like stocks and cryptocurrencies while rebuilding cash positions. Meanwhile, the 10-year Treasury yield, known as the anchor of global asset pricing, briefly touched 5.34% on October 1, hitting a 24-year high not seen since 2002, before pulling back.

Hartnett remains cautious while advising investors to start buying unloved bonds, and he raised a policy-level support expectation: if yields continue climbing and threaten the AI investment boom ahead of November's midterm elections, the U.S. government may increase Treasury buybacks.

He is particularly focused on whether the decline in bank stocks spreads broadly to small and mid-cap stocks, as this would signal that economists' and investors' growth optimism about a soft landing for the U.S. economy is seriously shaken, and massive selling pressure could ultimately spill over into tech stocks. In Hartnett's view, the investment momentum in the AI computing power supply chain still needs to withstand a dual stress test from the dollar and the long-end yield curve, and whether the explosive expansion of AI computing resource demand can translate into asset price gains depends on whether financing conditions and valuation discount pressures can ease simultaneously.

The Middle East energy inflation situation driving the recent surge in long-dated Treasury yields presents a pattern of diplomatic and military pressure running in parallel, with oil prices pulling back but geopolitical war premiums still in place. Qatar continues to mediate a seven-day mutual trust plan between the U.S. and Iran, with disagreements over the sequence of actions. The U.S. is deploying more forces to the Middle East, and Iran is preparing for a possible resumption of large-scale U.S. strikes.

As of 16:40 Beijing time on October 2, Brent crude futures, the international oil pricing benchmark, last traded at $99.48 per barrel, down 2.77% on the day, while WTI crude futures traded at $89.52 per barrel, down 3.61%. Based on the settlement prices of $72.48 and $67.02 on February 27, the last trading day before the war broke out on February 28, the two benchmarks are still up about 37.3% and 33.6% respectively. This comparison uses near-month futures price benchmarks at each point in time, which sufficiently illustrates that even after the recent pullback, energy prices remain significantly above pre-war levels.

Bank of America's Michael Hartnett: Risk-Off Sentiment May Persist Until the Dollar Index Peaks

Michael Hartnett, the veteran strategist at Bank of America, and his strategy team say investors will continue avoiding riskier trades until the dollar's recent sharp rise shows signs of peaking. Beyond waiting for the key signal of a dollar top, the strategist and his team said in a latest report that market unease and anxious selling may persist until rising bond yields retreat from their highest levels in more than 20 years.

He recommends buying the assets that the market despises, namely those that have recently suffered major sell-offs, and has started leaning toward adding some long-dated Treasury allocations that have been persistently sold off. As financial market investors exit riskier asset positions and begin rebuilding cash buffers, the Bloomberg Dollar Index has risen 3% from its September low. At the same time, bond yields have climbed, driven by inflationary pressures from the Iran war, expectations of further monetary tightening ahead, and strong corporate earnings growth.

As shown in the chart above, the dollar index and Treasury yields have surged recently, and stock market gains have stalled. Hartnett said that while recent price action indicates the market is reducing leverage and exposure to risk assets like stocks and cryptocurrencies, more aggressive U.S. government Treasury buybacks could provide downside support, especially if rising yields threaten the AI investment boom ahead of November's U.S. midterm elections.

Hartnett said that if small and mid-cap stocks also join bank stocks in sharp declines, downside risks would become more concerning. He stressed that this trend would significantly indicate that market optimism about strong economic growth has peaked and would ultimately drag down tech stocks.

From Energy Transport Bottlenecks to the AI Boom's Financing Kill Line

The series of cautious views recently put forward by Bank of America's veteran strategist Michael Hartnett has consistently revolved around funding, positioning, and the bond market. On September 11, his team noted that U.S. equity funds had seen net outflows of $14.2 billion over the prior three weeks, and average weekly inflows into global equity funds had fallen from $52 billion in July to $7 billion.

A subsequent Bank of America September fund manager survey showed that although cash allocations rose to 3.9%, they remained at a low level that he identifies as triggering a contrarian sell signal for risk assets, while disorderly rises in bond yields became the tail risk respondents feared most. On September 25, he also warned that the MOVE index of Treasury volatility had risen 33% in two days.

These latest threads of Hartnett's views mean that even if strong earnings and economic growth driven by the AI computing theme remain resilient, thin cash buffers, rising bond volatility, repeatedly high Treasury yields, and a stronger dollar could also compress investors' ability to continue taking on risk.

Energy transportation is recovering, but restoring normal transport costs remains distant. The restart of Saudi Arabia's east-west pipeline and the resumption of loading at Yanbu port have added export routes bypassing the Strait of Hormuz. Its designed capacity is 7 million barrels per day, while Reuters cited actual throughput estimates of only about 2 million to 2.65 million barrels per day on September 29.

Although statistics show some recovery in Hormuz traffic, with LNG departures reaching 19 to 21 cargoes in September, three tankers were still attacked by unidentified projectiles on September 29. The Bab el-Mandeb Strait also requires escort demand, with the French military saying on October 1 that about 10 merchant vessels were escorted through over the past week. The differences in energy routes for major Persian Gulf oil producers are especially critical: Yanbu northbound to Europe can pass through the Suez Canal, while southbound to Asia usually still must go through Bab el-Mandeb, and insurance, escort, and diversion costs continue to constrain transport efficiency.

The volume of supply recovery and how cheaply energy can be delivered are two variables the market needs to price simultaneously.

The AI Boom's Financing Kill Line

Against the backdrop of energy inflation driving 10-year Treasury yields to more than two-decade highs, the surge in the dollar index has pushed up safe-haven demand while risk appetite remains depressed, and the financing kill line for the AI investment boom appears increasingly close. As the 10-year Treasury yield, the anchor of global asset pricing, hits its highest since 2002, benchmark financing costs near historic highs are beginning to constrain financing progress critical to AI capital expenditure and AI infrastructure project returns, and the market is increasingly questioning whether expected returns on many large AI data center projects can continue to cover rising capital costs.

When the expected cash return from new computing projects after deducting power, operations, maintenance, and equipment renewal expenses cannot cover cost metrics including financing costs, continued expansion will struggle to create economic value, and an individual large AI infrastructure project may begin to collapse from that point. It first constrains marginal projects with weak cash flow and financing not yet locked in.

The 10-year Treasury is called the anchor of global asset pricing because of its benchmark role in the dollar financing system and in valuing medium- and long-term cash flows. The U.S. Treasury market is massive and actively traded, and the dollar is widely used in international financing and reserves, so changes in its yield have cross-market effects. Dollar corporate bonds typically reference Treasury yields of similar maturity plus credit spreads, mortgage rates are affected by Treasury and mortgage-backed securities pricing, and stock and real estate valuations are highly sensitive to discount rates on future cash flows. When this benchmark rises while earnings and rent expectations do not improve in tandem, asset prices face downward pressure.

The impact also transmits overseas through dollar financing costs, currency hedging, and cross-border capital flows, while different currencies, maturities, and credit risks determine how severely specific assets are hit. From the perspective of data center projects, GPU servers, power connections, and cooling facilities require upfront investment, while computing service revenue is recovered over time. Rising long-term risk-free rates and credit spreads will simultaneously raise financing costs and lower the valuation of future cash flows, and a stronger dollar will also increase debt servicing and equipment procurement burdens for some non-U.S. borrowers.

Therefore, strong computing demand and tighter project financing conditions can occur at the same time, and the first to be tested are usually expansion plans that rely on external financing and have longer payback periods.

The policy support Hartnett hopes for is precisely to ease this capital cost constraint: the Treasury has already expanded long-term Treasury liquidity support buybacks, but its official goal is to improve market liquidity, and further stepping up protection for AI investment remains his policy judgment. For investors' overall strategy, the dollar's path, 10-year and longer Treasury yields, and the market performance of bank and small and mid-cap stocks are becoming important signals for testing whether the AI computing super bull market can continue to spread to broader stock market sectors.