U.S. Treasury yields hit a 24-year high, how should investors respond? Bank of America strongly recommends U.S. mid-cap stocks.

Bank of America strategists believe small-cap stocks could be poised for a rebound if the 10-year Treasury yield approaches its year-end target of 5%. However, the bank still favors mid-cap stocks due to persistently high leverage and refinancing risks. Meanwhile, the benchmark 10-year Treasury yield briefly jumped to 5.36% on Wednesday, hitting a 24-year high just hours before the U.S. government auctioned debt of that maturity. BofA: Small-Cap Risks Intensify, Mid-Caps More Stable Bank of America strategist Jill Carey Hall wrote in a note to clients that historically, when the 10-year Treasury yield exceeds 6%, the Russell 2000's forward price-to-earnings ratio declines. But when yields are between 6% and 8%, earnings-per-share (EPS) revisions are above average, suggesting that past valuation compression coincided with stronger earnings growth. As a result, within the 6% to 7% yield range, small-cap average returns have historically not been weak. Today, the Russell 2000's P/E ratio is already below the historical averages seen in previous 5%-6% and 6%-7% rate environments. Although valuations have been compressed, structural changes have made small-caps more vulnerable to high interest rates than in previous cycles. The negative correlation between small-cap P/E ratios and the 10-year Treasury yield has reached an all-time high, driven by elevated corporate leverage and a record share of unprofitable companies in the Russell 2000. BofA notes that high interest rates partly driven by Federal Reserve rate hike expectations pose a direct challenge, as roughly half of small-cap debt is short-term or floating-rate, and the share of long-term debt maturing within the next five years is rising. BofA expects the 10-year Treasury yield to be 5.0% by year-end. If yields stabilize, this would provide an opportunity for a small-cap rebound. But the bank warns that yields could remain elevated or rise further before economic data weakens or financial conditions tighten. Accordingly, BofA continues to recommend overweighting mid-cap stocks over small-caps, citing mid-caps' lower interest rate risk and similar earnings recovery profile to small-caps in the second half of the year. Which Mid-Cap Stocks Are Worth Watching? Given BofA's preference for mid-caps, the following are top-ranked U.S. mid-cap stocks screened by Seeking Alpha's quantitative rating system, covering sectors including energy, semiconductors, biotechnology, electronics manufacturing, and hotel REITs, for investors' reference: