By time-of-flight (TOF) neutron diffraction experiments, the influence of segregation-induced microstructure bands of austenite (γ) and martensite (α' ) phases on the partitioning of stress and strain between these phases was investigated. Initially, tensile specimens of a Co-added stainless steel were heat treated by quenching and partitioning (Q&P) processing. Tensile specimens were subsequently loaded at 350 °C parallel to the length of the bands within the apparent elastic limit of the phase mixture. Lattice parameters in both axial and transverse directions were simultaneously measured for both phases. The observation of a lattice expansion for the γ phase in the transverse direction indicated a constraint on the free transverse straining of γ arising from the banded microstructure. The lateral contraction of α' imposed an interphase tensile microstress in the transverse direction of the γ phase. The multiaxial stress state developed in the γ phase resulted in a large deviation from the level of plastic strain expected for uniaxial loading of single phase γ. Since segregation-induced banded microstructures commonly occur in many engineering alloys, the analysis of stress and strain partitioning with the present Q&P steel can be used to interpret the observations made for further engineering alloys with two-phase microstructures.