BofA: AI Trade Can Withstand Higher Bond Yields — SkimNews
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- Bank of America's global equity derivatives team, led by Benjamin Bowler, told clients in a Wednesday report that bond yields must spike much higher to derail the AI trade, noting AI sector earnings growth is outpacing share-price appreciation and shrinking price-to-earnings multiples.
- BofA's proprietary bubble risk indicator — a price-based model incorporating returns, volatility, momentum, and fragility — remains untroubled about U.S. equity indices, with analysts expecting any pullback to be quickly reversed.
- The dot-com precedent underpins the argument: in the late 1990s, U.S. long bond yields jumped more than 200 basis points and the Fed hiked more than 100 basis points as the Nasdaq soared, and BofA's chart shows stocks have not yet decoupled from fundamentals in 2026.
- The 30-year Treasury's maximum drawdown this year has been just 7%, compared with a 25% sell-off in 2022, suggesting the bond market has not yet inflicted meaningful damage.
- U.S. interest payments sit at roughly 4.1% of GDP, versus approaching 5% in the late 1990s, and AI-driven productivity gains offer a plausible path to absorbing higher rate costs, BofA says.
- BofA's global financial stress index — tracking 20 to 40 measures of market anxiety across five asset classes — has shown no response despite long-dated yields hitting decade-plus highs, and derivative markets remain sanguine.
- Bowler flagged upcoming Fed meetings as the trigger risk, warning that 'a seemingly benign policy decision' could 'produce a disorderly bond market tantrum by undermining confidence in the broader policy mix.'
Why it matters: For AI-trade holders, BofA is saying the yield level itself isn't the threat — a 7% Treasury drawdown in 2026 versus 25% in 2022, plus an unreacted stress index, means bonds have further to run before equities crack. But Bowler's own caveat that a routine Fed decision could trigger a disorderly bond tantrum puts the next policy meeting, not the current curve, at the real inflection point for the trade.
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