U.S. Treasuries Are 'Heating Up': How Will Rising Long-Term Rates Affect Crowded Trades in Tech and Banking?

The U.S. stock market has not turned bearish, but it is crucial to closely monitor whether bank stocks can continue to withstand high interest rates and how crowded trades in technology and finance will be repriced.

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

Compiled by: DaiDai, Frank, MSX Maitong

Core Overview

• The yield on the U.S. 30-year Treasury bond has risen to 5.2%, with real yields climbing to 3%. Long-term rates are replacing corporate earnings as the core variable affecting risk assets;
• Technology and financial funds saw inflows of $52.8 billion and $8.8 billion respectively over the past four weeks, capital is still entering, but the degree of trading crowding has significantly increased;
• The most critical confirmation signal is not just whether yields continue to rise, but whether bank stocks can continue to benefit from high rates;
• If yields rise while bank stocks decline, it indicates that high rates may begin to shift from a 'strong economic signal' to 'pressure from tightening financial conditions';
• BofA is not broadly bearish on stocks but suggests the market may gradually shift from high beta, strong cycles, and crowded trades to defensive, dividend, dollar, and duration assets that may benefit from cooling growth;

Recently, the stock and bond markets have begun to provide two different answers.

The stock market is still discussing corporate earnings, AI investments, and economic resilience, while the bond market is worried about whether current asset prices can withstand higher funding costs if inflation does not come down and fiscal deficits do not stabilize, forcing the Federal Reserve to raise rates again.

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

As of the report's publication, the yield on the U.S. 30-year Treasury bond has risen to 5.2%, the highest since June 2007; the 30-year real yield has risen to 3%, the highest level since November 2008; meanwhile, long bond prices continue to fall, causing the bond prices of U.S. tech companies to drop to their lowest levels in two years.

The report summarizes the current environment with a simple expression: FCI > EPS.

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

This does not mean that U.S. stock earnings have turned negative; on the contrary, BofA's global earnings model still predicts a global earnings per share growth rate of about 9% over the next 12 months. Therefore, the real question is whether the current valuations, positions, and financing costs can maintain the previous balance even if earnings continue to grow.

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

Rising long-term yields tighten financial conditions; tightening financial conditions reinforce expectations of the Federal Reserve raising rates or maintaining a hawkish policy; once bank stocks can no longer benefit from high rates and instead decline as yields rise, the market may begin to reduce leverage and risk exposure, ultimately leading to a repricing of crowded trades in technology, finance, and industrials.

1. What Does This Research Report Really Want to Express?

In recent years, every time the U.S. stock market faces rising interest rates, the market has tried to digest 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 do not significantly impact credit and consumption, investors are willing to believe that the U.S. stock market can continue to seek balance between higher valuations and higher risk-free rates.

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

Before the report was released, the market had already pushed the probability of a Federal Reserve rate hike on July 29 to about 38%, and basically factored in the possibility of another rate hike before September 16. In a global fund manager survey conducted in July, 83% of respondents originally believed that the Federal Reserve would not raise rates before the U.S. midterm elections.

This indicates a significant divergence in the judgment of future policy paths between stock investors and bond investors.

The stock market is still trading on earnings growth, AI investments, and economic prosperity; the bond market is beginning to worry that, in an environment where inflation remains at 3%-4%, the labor market has not been significantly impacted by AI, and fiscal deficits and government bond supply continue to expand, the Federal Reserve may have to tighten policy again.

This is also the true meaning of the report's title 'Bonds Bringing the Heat'—bond yields are heating up and will transmit higher funding costs to stocks, credit, and the real economy.

The reasons are not hard to understand; rising long-term yields will affect the market through multiple channels:

• First, it will directly increase the financing costs for companies. Whether issuing bonds, making acquisitions, or expanding capital expenditures, higher rates will raise the funding threshold;
• Second, it will raise the discount rate used for stock valuations. Especially for tech companies that concentrate profits more in the future, even if earnings forecasts are not revised down, higher real rates will reduce the multiples the market is willing to pay;
• Finally, it will increase government interest expenses, intensifying fiscal dependence on bond supply, which in turn creates pressure on long-term yields;

BofA believes that this pressure does not solely stem from short-term policy changes but is also related to deeper supply structures in the 2020s.

Compared to the globalization expansion, demand-driven, and low inflation-dominated 2010s, the 2020s are gradually shifting to a more supply-driven market: labor supply is constrained by immigration policies, commodity supply is affected by tariffs and protectionism, energy supply is easily disturbed by geopolitical conflicts, while government bond supply continues to expand.

The U.S. government is still running an annual fiscal deficit of nearly $2 trillion, with annual interest expenses of about $1 trillion. Even if tariff revenues increase, it is difficult to fundamentally change the fiscal structure.

Therefore, long-term rates face not only changes in Federal Reserve policy but also structural pressures from fiscal deficits, bond supply, and supply-side inflation.

However, this does not mean that long-term rates will rise indefinitely, nor does it mean that the U.S. stock market will necessarily enter a bear market. A more accurate understanding is that the market has been accustomed to interpreting high rates as a 'strong economy', but as rates rise to higher levels, they will gradually constrain the economy and risk appetite.

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

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

2. Bank Stocks as Confirmers, Industrial Semiconductors as Sentinels

Rising yields do not necessarily mean that risk assets will inevitably weaken.

In normal re-inflation or economic prosperity trades, rising long-term rates usually indicate improved growth expectations and a steepening yield curve. In this case, banks can earn higher interest income through rising asset-side yields, so bank stocks often rise in sync with bond yields.

In other words, the market is normally trading on 'rising yields → improved economic expectations → bank earnings benefit → bank stocks rise.'

What truly needs attention is whether the relationship between bank stocks and bond yields begins to reverse, i.e., whether it will turn into 'yields continue to rise → financing and liability costs increase → credit and balance sheet pressures rise → bank stocks decline.'

Once the market switches from 'rising yields, bank stocks rising' to 'the higher the yields, the weaker the bank stocks,' the implications will change significantly.

At this point, investors will no longer simply interpret high rates as a sign of a strong economy but will begin to worry about higher deposit costs, financing pressures, unrealized losses on securities, risks in commercial real estate, and changes in credit quality.

Bank stocks will gradually shift from beneficiaries of high rates to bearers of pressure from tightening financial conditions. BofA views this change in relationship as an important confirmation signal for risk assets to deleverage.

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

However, before this signal truly appears, the market may still digest interest rate pressures through earnings growth, sector rotation, and policy expectation adjustments. Therefore, the significance of bank stocks lies not in prematurely declaring a market peak but in helping investors distinguish whether the current high rates still reflect economic resilience or have begun to harm the financial system.

Another noteworthy precursor signal comes from industrial semiconductors.

The 'blue-collar semiconductor' index, composed of companies like Texas Instruments, Analog Devices, NXP, Microchip, ON Semiconductor, STMicroelectronics, Infineon, and Monolithic Power, has already fallen about 21% from its June peak.

Unlike AI chip companies like Nvidia, these companies' products are more widely used in automotive, industrial equipment, energy, communications, and manufacturing, and are therefore often seen as leading indicators of industrial cycles and real economic demand. The early entry of blue-collar semiconductors into a technical bear market indicates that at least in the industrial chain, the market has begun to show marginal divergence.

It is worth noting that over the four weeks of July, technology funds saw cumulative inflows of $52.8 billion, setting a historical record; financial funds saw inflows of $8.8 billion, the largest scale since January 2022, and the industrial sector is also at one of the most significant overweight levels for investors since 2021.

The continuous inflow of funds indicates that the market still has confidence in these directions. However, the higher the concentration of funds, the higher the market's sensitivity to changes in expectations. When positions, narratives, and valuations concentrate on a few sectors, even if the fundamentals do not deteriorate significantly, marginal changes in interest rates, policies, or capital flows can lead to greater price volatility.

BofA's bull-bear indicator currently stands at 9.6, well above the 8.0 contrarian sell threshold; the global fund manager cash ratio has also dropped to 3.6%, below the 4.0% sell threshold.

This means that the market does not lack optimistic consensus; it can even be said that optimism has become the mainstream consensus. What needs to be noted is that when investors have high positions and low cash, the market's short-term capacity to respond to unexpected shocks will decrease.

Overall, this is better understood as a market thermometer; when positions, capital flows, and sentiment are all at high levels, the market may shift from a one-sided upward phase to a phase that requires higher standards for earnings quality, valuation levels, and capital structure.

3. Shifting from Crowded Trades to More Balanced Allocations

It is important to emphasize that BofA does not simply conclude 'liquidate stocks, be broadly bearish.'

What the report truly expresses is a market style switch, namely a gradual shift from high beta, strong cycles, and assets reliant on valuation expansion and economic prosperity expectations to defensive, dividend, dollar, and duration assets that may benefit from cooling growth.

In its tactical framework, BofA recommends going long on defensives, dividends, dollars, and duration while reducing exposure to crowded directions such as banks, brokerages, technology, and industrials.

The focus here is not simply on judging which assets will rise and which will fall, but on controlling the portfolio's dependence on a single macro scenario.

If the market continues to maintain strong growth, earnings expansion, and rising risk appetite, then technology, finance, and industrials may still perform based on fundamentals; but if long-term rates rise further and financial conditions continue to tighten, then assets with high valuations, high positions, and high cyclical sensitivity may experience more pronounced volatility.

Therefore, BofA's recommendation is essentially a rebalancing, namely to retain exposure to growth assets while increasing assets that can hedge against changes in interest rates, policies, and economic expectations.

The most easily misunderstood aspect is 'going long on duration,' which does not mean unconditionally buying long-term U.S. Treasuries while long-term yields are still rising and bond supply pressures have not eased.

More accurately, this is a trading logic that may be divided into two phases:

• In the first phase, inflation, fiscal supply, and rate hike expectations drive long-term yields up, putting continued pressure on long bond prices;
• In the second phase, if excessively high rates ultimately impact the economy, banks, and risk appetite, leading to a cooling of prosperity expectations, the Federal Reserve will shift to stabilizing long-term rates, and duration assets will gain greater rebound elasticity;

In other words, BofA is not betting that bonds have already bottomed; rather, it is betting that the longer high rates persist, the higher the probability of inducing cooling growth and policy shifts.

The dollar serves as a more direct hedging tool within this framework. If the Federal Reserve's stance is more hawkish than the market expects, both interest rate differentials and safe-haven demand may continue to support the dollar.

Meanwhile, there are signs of a rebalancing of global funds from the U.S. to Asia and emerging markets. In the week the report was released, emerging market equity funds saw inflows of $29.6 billion, close to the second-highest on record; inflows into Chinese stocks reached $21.3 billion, the third-highest on record; and the South Korean market saw cumulative inflows of $16.3 billion over the past four weeks, setting a record.

However, structural optimism and short-term chasing are not the same thing. When extreme capital inflows occur simultaneously in China, South Korea, technology, and emerging markets, short-term trading may also become crowded. The long-term revaluation logic of Asian assets can continue to hold, but after a large influx of capital, prices will become more susceptible to changes in the dollar, interest rates, and policy expectations.

In Conclusion

This report does not declare that the U.S. stock market is about to enter a bear market.

Corporate earnings are still growing, AI investments are still expanding, and global funds have not fully withdrawn from risk assets.

However, long-term rates themselves act like a thermometer, reminding the market that financial conditions are heating up and that it is essential to closely monitor whether this pressure will further transmit to banks, credit, and corporate earnings.

Moreover, even if financial conditions continue to tighten, the market may not only face a comprehensive downturn; it is more likely that capital will gradually shift from overvalued and heavily positioned directions to assets with more certain earnings, more stable cash flows, and more reasonable valuations.

Thus, we need to see where the heat is being transmitted and adjust the ratio of risks and opportunities before the market completes a new round of pricing.