Long-term U.S. borrowing costs rose sharply in late July, placing renewed pressure on technology debt, cyclical stocks and other assets dependent on low funding costs. The 30-year Treasury yield reached 5.2%, its highest level since June 2007, while the 30-year real yield — the return after accounting for inflation — climbed to 3%, a level last seen in November 2008.
BofA Global Research argued in its July 23 note, “The Flow Show: Bonds Bringing the Heat,” that financial conditions had become more influential for markets than expected earnings growth. The bank summarized that view with “FCI > EPS,” referring to financial conditions indexes and earnings per share.
Its global earnings model continued to project roughly 9% earnings-per-share growth over the following 12 months. The immediate concern was therefore less about an abrupt deterioration in corporate profits than about the valuation and refinancing consequences of higher rates. Long-duration assets, whose projected cash flows sit further in the future, generally become less attractive when real yields rise.
The move was already visible in credit markets. Prices of U.S. technology corporate bonds fell to a two-year low as the 30-year real yield approached 3%, according to the material. Higher Treasury yields feed into borrowing costs across corporate debt markets, increasing the return companies must offer lenders when issuing or refinancing bonds.
Rate expectations diverge from fund-manager views
Markets were also reassessing the likelihood that policy rates would remain restrictive for longer. Pricing ahead of the July 29 policy decision put the implied probability of a rate increase at about 38%, according to the BofA note.
That pricing differed markedly from a July survey of global fund managers, in which 83% of respondents expected no increase before the U.S. midterm elections. The gap illustrated the uncertainty around whether rising long-term yields reflected resilient growth, inflation concerns, increased government borrowing needs, or a growing expectation that central banks would sustain tight policy.
Michael Hartnett, chief investment strategist at BofA Global Research, said global central banks had delivered 23 rate increases so far that year. His team’s models indicated that another 18 planned increases could arrive before December.
That pace of tightening raises the cost of leverage across markets. For cryptocurrency, which does not generate contractual interest or dividends, higher risk-free returns can change the relative appeal of holding volatile tokens. Treasury bills and cash-equivalent instruments offer a fixed return, while digital assets depend largely on price appreciation and market liquidity.
Banks offer a test of market stress
BofA identified bank equities as a practical gauge of whether markets were interpreting higher yields positively or beginning to treat them as a threat to financial conditions.
Banks can initially benefit when yields rise, especially if lending returns increase faster than deposit costs. The dynamic can turn negative when depositors demand higher rates, funding becomes more expensive, credit losses rise, or securities held on bank balance sheets decline in value. A sustained fall in bank shares alongside rising Treasury yields would suggest markets were focusing on those tightening effects.
The note also flagged commercial real estate and changing credit quality as areas vulnerable to higher funding costs. Commercial property borrowers often rely on refinancing, leaving the sector exposed when debt matures into a materially higher-rate environment. Credit deterioration could then extend pressure beyond banks into broader corporate lending markets.
Before that type of banking-sector signal emerges, BofA pointed to industrial semiconductor companies as an earlier indicator of cyclical demand. Its “blue-collar semiconductor” basket included Texas Instruments, Analog Devices, NXP, Microchip, ON Semiconductor, STMicroelectronics, Infineon and Monolithic Power. The basket had fallen about 21% from its June high, according to the report.
These companies sell chips used in automobiles, industrial equipment and consumer electronics, making their performance more tied to manufacturing and capital-spending cycles than the largest cloud-computing and artificial-intelligence names. Their decline suggested that parts of the equity market were already pricing in softer activity or less favorable financing conditions.
Heavy flows leave little margin for disappointment
The pressure from rates arrived while fund flows indicated unusually strong appetite for growth-sensitive sectors. Technology funds attracted $52.8 billion in the prior four weeks, a record cited by BofA. Financial funds received $8.8 billion, their largest inflow since January 2022, while allocations to industrials ranked among the most overweight since 2021.
BofA’s bull-and-bear indicator stood at 9.6, above its 8.0 contrarian sell threshold. Global fund-manager cash levels were 3.6%, below the bank’s 4.0 sell threshold. Low cash allocations can leave portfolios more exposed if crowded positions begin to unwind, since managers have less liquidity available to buy declines or meet redemptions without selling existing holdings.
Private-client accounts held $4.5 trillion, while their cash allocation had dropped to a record-low 9.6%, according to Hartnett’s figures. Gold funds, by contrast, recorded $2 billion in weekly inflows, their strongest week since April. The pattern pointed to selective demand for traditional defensive assets even as equity-sector flows remained concentrated in technology, financials and industrials.
A two-stage outlook for duration assets
BofA outlined a two-stage rates scenario. In the first stage, inflation concerns, government debt supply and the possibility of further policy tightening push long-dated yields higher. That environment weighs on long bonds, high-beta equities and other assets reliant on ample liquidity.
A later stage could emerge if higher rates slow economic activity enough to weaken risk appetite. Under that outcome, duration-sensitive assets could regain appeal if central-bank policy stabilizes yields or markets begin pricing eventual easing. The sequence matters because a rally in bonds after a growth slowdown would arrive only after the same higher rates had imposed stress on credit and risk assets.
Flows during the period also showed capital moving toward emerging markets and Asian equities. Emerging-market equity funds received $29.6 billion in the referenced week, close to their second-largest inflow on record. China equity funds drew $21.3 billion, their third-largest inflow on record, while South Korean equity funds attracted $16.3 billion over four weeks, a record.
For digital-asset markets, the rate backdrop places greater emphasis on liquidity, leverage and correlation with technology stocks. A market built around round-the-clock trading can reprice quickly when funding becomes scarce, particularly during periods when traditional banking and settlement channels are less active. The Treasury market’s rise in real yields therefore provided a more immediate warning for risk assets than the still-positive earnings outlook alone.
Wondering how rates reshape crypto, too? Explore what do interest rates have to do with bitcoin and connect macro shifts to digital assets.
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