BofA's Hartnett: Risk-Off Sentiment to Persist Until the Dollar Peaks
nashnova research
BofA strategist Michael Hartnett warns that investors will keep fleeing risk assets until the dollar's rally tops out and bond yields retreat from two-decade highs — and says now is the time to start adding bonds.
Why are investors still running?
The Bloomberg Dollar Index has climbed 3% from its September low as investors exit risk positions and rebuild cash buffers — in turn fuelling more dollar strength.
This means → The dollar rally is not driven by optimism; risk aversion itself is feeding the currency's rise, creating a self-reinforcing loop.
Bond yields have climbed in tandem to their highest in over twenty years, pushed by three forces: inflation pressure from the Iran conflict, expectations of further monetary tightening, and still-strong corporate earnings.
"Buy the humiliation" — what is Hartnett recommending?
Hartnett's phrase is blunt: "buy the humiliation" — start accumulating bonds precisely when the asset class looks most beaten-down.
In plain terms = when everyone else is dumping bonds, that is when they get cheap. He sees a window opening now to begin adding them to portfolios.
He notes that investors are actively deleveraging, but a more aggressive Treasury buyback programme by the US government could provide a floor beneath prices.
What would it take for risk appetite to return?
Hartnett sets two preconditions: the dollar rally must peak and bond yields must pull back from highs — until both happen, risk assets stay under pressure.
He flags two catalysts: rising yields could undermine the valuation basis of the AI investment boom, while the approach of November's US midterm elections adds policy uncertainty.
This reflects a deeper tension — the market's core question is not "is the economy strong?" but "does the rate environment allow risk appetite to come back?"
What does the worst case look like?
Hartnett flags a specific downside signal: if small- and mid-cap stocks follow bank stocks into a sharp decline, it means the market's bet on strong growth has peaked.
This means → Small caps are the most economically sensitive cohort. Once they join the sell-off, the "strong economy → strong stocks" logic chain is breaking.
The transmission path: growth optimism peaks → small caps and banks lead the decline → tech stocks eventually get dragged down too.
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