MOVE Index volatility jumped 35 percent, signaling acute stress in the Treasury collateral system, according to Bank of America strategist Michael Hartnett.
The surge in bond-market volatility raises the risk of a deleveraging cascade across the financial system, with potential spillover into equities if bank stocks fall while yields rise, Hartnett said.
Hartnett outlined two primary triggers for risk-off selling. The first: a U.S.-Iran capitulation that sends oil prices lower. The second: a midterm election outcome where voters prioritize affordability over equity gains—a Democratic victory, he suggested, could trigger a historic bond sell-off.
A critical scenario emerges if bond yields climb even as oil prices fall, tightening financial conditions independent of energy-driven inflation. Hartnett emphasized that a shift from "rising bond yields, rising bank stocks" to "higher yields, falling bank stocks" would set off deleveraging across risk assets.
Bank of America recommends positioning in commodities and emerging market assets while targeting peak-yield opportunities: 30-year Treasuries, mega-cap technology stocks, small-cap equities, biotech, and real estate.
For a bullish market outcome, Hartnett said political gridlock, declining oil, and a rate ceiling would allow AI and consumer sectors to thrive.
