SKN | Bank of America Sees Risk-Off Conditions Persist Until Dollar and Bond Yields Peak

Key Takeaways:

• Bank of America strategist Michael Hartnett expects a risk-off environment to persist until the recent dollar rally shows signs of peaking.
• Hartnett also identifies elevated bond yields as a key source of market pressure, with recent yields reaching their highest levels in more than two decades.
• BofA’s latest fund-flow analysis shows $18.8 billion flowing into bond funds in the week through September 30, including $7.4 billion into long-term bond funds.
• The bank continues to monitor whether tighter financial conditions spread beyond banks and large technology stocks into small- and mid-cap equities.

Bank of America is maintaining a cautious view on risk assets as a stronger U.S. dollar and elevated bond yields continue to tighten financial conditions. Strategist Michael Hartnett argues that the current risk-off environment is likely to persist until the dollar’s recent advance peaks, while easing pressure in long-dated bonds would provide an additional signal that market conditions are stabilizing.

BofA Places the Dollar at the Center of the Risk Equation

Hartnett’s framework puts the dollar at the center of the bank’s current market assessment. The Bloomberg Dollar Index has risen 3% from its September low, coinciding with investors rebuilding cash positions and reducing exposure to riskier assets. BofA’s latest analysis indicates that tighter financial conditions are already affecting equity-market breadth, with 400 S&P 500 stocks trading below their 50-day moving averages and 300 below their 200-day averages.

For BofA, the significance is broader than currency performance. A sustained dollar advance can tighten global financial conditions, particularly for investors and borrowers with significant non-dollar exposures, making the direction of the currency an important variable in the bank’s assessment of cross-border risk.

Bond Flows Show Investors Are Beginning to Reposition

BofA’s own fund-flow data provides evidence of a shift toward fixed income. Bond funds attracted $18.8 billion in the week through September 30, while long-term bond funds recorded $7.4 billion of inflows—their strongest weekly inflow since May 2025. Municipal bonds also attracted a record $4.2 billion during the period.

The flow data is significant for BofA because it suggests investors are beginning to reconsider fixed income after a prolonged period of weak bond sentiment. Hartnett has described the recent environment as one in which investors have been reluctant to own bonds, making renewed demand an important component of his market framework.

BofA Sees a Potential Policy Floor for Bond Markets

Hartnett also identifies a potential stabilizing mechanism if rising yields begin to threaten the AI investment cycle. He points to the possibility of more aggressive U.S. Treasury buybacks as a floor for bond markets, particularly if higher borrowing costs begin to undermine the capital spending supporting the technology sector.

This creates an important distinction in BofA’s analysis: higher yields are not viewed solely as a market signal. They can eventually become a constraint on corporate investment, financing conditions and economic growth, creating incentives for policymakers to respond if financial conditions tighten sufficiently.

The Bank Is Watching for Broader Equity Weakness

For BofA, the next warning signal would be a deterioration extending beyond banks and the largest technology companies. Hartnett said downside risks would become more concerning if small- and mid-cap stocks also joined the decline, because that would suggest optimism surrounding strong economic growth was beginning to weaken.

For HNWI investors, the strategic message from BofA is therefore centered on liquidity, duration and currency exposure. The bank is not simply identifying weaker equity conditions; it is tracking the interaction between the dollar, bond yields and financial conditions. Whether the dollar peaks and long-term yields stabilize will remain important variables in determining how BofA assesses the next phase of global asset allocation.

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