Original author: Long Yue
Source: Wall Street Journal
U.S. Treasuries are just $6.5 billion away from $40 trillion. As of last Friday’s close, this “largest round number in history” is within reach. In his latest Flow Show report, Bank of America’s chief investment strategist Michael Hartnett titled it “Strife Begins at Forty,” identifying this moment as the central narrative of today’s markets.
Hartnett noted that U.S. Treasury debt will not only surpass $40 trillion in the coming days but is also set to reach $50 trillion around 2029. In this environment, Hartnett believes that going long on gold is currently the optimal strategy, as gold remains the best tool for hedging against dollar depreciation, bond collapse, and asset inflation.
Interest on debt has become the "largest expenditure," putting pressure on the bond market.
Over the past 12 months, U.S. debt interest payments have reached $1.4 trillion and are nearing surpassing Social Security as the largest single item of federal spending.
Hartnett explicitly stated that this trend will not reverse unless the 5-year U.S. Treasury yield falls below 3.25%, which is nearly impossible without a major deflationary shock or recession.
Meanwhile, the 30-year U.S. Treasury issued last week at a yield of 5.126%, reaching a 25-year high. Hartnett summed up this absurdity in one sentence: “The U.S. stock market hit an all-time high on the same day that U.S. Treasuries issued at their highest yield in 25 years—that’s reality.”
The AI funding frenzy is pushing out Treasury buyers.
Pressure in the bond market is not only coming from governments. Data from Nomura strategist Charlie McElligott shows:
- Total corporate bond supply increased by 61% year-over-year.
- The issuance volume of AI/hyperscale data center/data center-related bonds (investment grade + loans) has reached approximately 12 times the average annual level from 2015 to 2024, totaling $269 billion year-to-date, which is twice the full-year amount for 2025.
A surge in corporate bond supply is structurally steepening the U.S. Treasury yield curve (bull flattening), crowding out capital that would otherwise flow into long-term Treasuries. CTA trend strategies are signaling an overall "short" position on G10 bonds, with gross exposure at the 12th percentile since 2010, and short-term rate exposure at the 10th percentile.
This creates a vicious cycle: widening credit spreads → long-duration buyers are squeezed out → yield curve bears steepen → market concerns about "losing control" intensify.
Asset allocation principle: Gold is the core solution
Hartnett reaffirmed his major asset allocation frameworks for the 2020s in the report, further reinforcing them for 2026:
ABB (Away from Bonds), ABD (Away from USD), AI (All-in on AI), etc.
Behind these four principles lies a common logic: policymakers view "nominal GDP growth" as a solution to debt problems and treat the stock market as "too big to fail." This is why Hartnett wrote last week: "Wall Street is trading without fear."
His summary of the current market sentiment is: "Massive EPS growth, $10 trillion in wealth creation by 2026, AI capital expenditures exceeding $1 trillion in 2027... the bulls have the door wide open, with the only constraints being bonds (soaring yields), voters (a socialist wave), and the fact that everyone is already betting on upside."
Go long on gold: The optimal solution to counteract dollar depreciation
Under the "ABD (Away from the Dollar)" framework, Hartnett has provided a clear trading direction: go long on gold.
His logic is straightforward: Gold remains the best hedge against dollar depreciation, bond collapses, asset inflation, and the political博弈 between capitalist populism and socialist populism in the 2020s.
The logic behind the dollar's weakness is equally clear. The U.S. government has signaled through yen exchange rate intervention that it does not wish to see the 10-year Treasury yield exceed 5%. With the midterm elections approaching, CPI is expected to remain in the range of 2.8%–3.6%, and core CPI in the range of 2.1%–2.6%, leaving limited policy tolerance for further yield increases.
Hartnett believes that Warsh’s hawkish remarks at the Jackson Hole meeting on August 28, combined with the possibility of the Bank of Japan raising rates on September 18, could jointly signal "mission accomplished," providing justification for suppressing yields and mitigating the risk of yen depreciation.
Under the "Stay Away from Bonds" framework, which assets are quietly outperforming?
Under the "ABB" (Away From Bonds) framework, Hartnett highlights an interesting phenomenon: despite rising yields in 2026, long-duration, previously overlooked assets—REITs, biotech (XBI), regional banks (KRE), and small caps—are quietly outperforming the broader market.
The market is using its actions to price in that yields have peaked. Hartnett believes that the next major rise in yields would be "too dangerous to be allowed" by authorities, which is precisely why these assets are receiving support.
The Other Side of AI Trading: Shorting AI Bonds
Under the "All-In AI" framework, Hartnett proposed a counterintuitive trade: shorting AI bonds.
The logic is: over $1 trillion in capital expenditures combined with negative free cash flow means AI companies must continuously raise large amounts of debt financing. This trade was first proposed by Hartnett at the end of 2025, and he stated it is "far more profitable" than going long on AI stocks in 2026.
He believes the optimal bubble strategy is to go long on both "arrogance" (AI) and "humiliation" (neglected cyclical assets). Drawing a historical analogy: during the 1999 internet bubble, emerging markets; and during the 2007/08 subprime/China bubble, oil—both were beneficiaries of "humiliation assets" at the peak of the bubble.
Key future milestones: Elections and policies are the biggest variables
Hartnett listed key market events for the coming months:
- August 28: Warsh speaks at Jackson Hole
- September 4: August Non-Farm Payrolls data
- September 11: August CPI data
- September 16: FOMC meeting (35% probability of an interest rate hike)
- September 18: Bank of Japan meeting (74% probability of rate hike)
- September 24: Major diplomatic event between China and the United States
- October 4: Brazilian General Election
Hartnett’s final assessment is clear: If Republicans retain control of the Senate and Abbott holds onto the Texas governorship, the stock market—particularly the AI sector—is expected to surge further toward bubble levels by 2027; if Democrats win the Senate and the Texas governorship on November 3, the stock market, dollar, and bond yields could face declines of more than 10% by year-end.