Bank of America's derivatives team says an AI bubble burst would likely send both stocks and bond yields down, and suggests a hedge

Context

This item is secondhand: ZeroHedge is summarizing a Bank of America Global Equity Volatility Insights note dated October 13. The bubble framing is ZeroHedge's headline, and BofA's hedge pricing is its own estimate.

Deep dive

On October 14, ZeroHedge posted: The OpenAI Tell: BofA Says The AI Bubble Will Burst With Stocks AND Yields Tumbling, Here Is The Cheapest Hedge.

The article says Bank of America's derivatives team treats the October 8 session as a preview of an eventual AI unwind. That day, ZeroHedge writes, the FT reported that OpenAI had told investors its annualized revenue was nearing $50 billion at the end of September, about $20 billion less than had been floated weeks earlier, and the Nasdaq fell.

According to a summary of the BofA note, the Nasdaq fell while Treasury yields also fell that day, suggesting an AI unwind could look more like the dot com bust than the stocks down, yields up pattern of recent months. The bank's suggested hedge is a long dated Nasdaq 100 lookback put that only pays if the 10 year yield also falls by a set amount, which BofA estimates costs about 3.62%, roughly 46% cheaper than a plain lookback put.

ZeroHedge added that on October 14 the AI trade cracked again from the credit side as CoreWeave fell, dragging the Nasdaq to its worst day since June.

What to expect next

Watch whether bonds rally during the next AI driven equity selloff, which would support BofA's view, or whether yields rise as in recent months.

Also watch for further revenue disclosures from OpenAI and Anthropic, since BofA's note treats news about lab revenue as the trigger investors watch most closely for a broader unwind in AI stocks. Hedge costs may rise as demand grows.