US debt approaching $40 trillion, BofA's Hartnett: Going long gold is the best move right now
- Key View: BofA's chief strategist Michael Hartnett believes that US Treasury debt is about to break through the $40 trillion mark, with debt interest becoming the federal government's largest expenditure and the bond market under sustained pressure. In this context, going long gold is the optimal trading strategy at present, while adhering to an asset allocation framework of "stay away from bonds, stay away from the dollar, and go all-in on AI."
- Key Elements:
- US Treasury debt is only $65 billion away from $40 trillion, and is expected to reach $50 trillion around 2029; debt interest payments over the past 12 months have reached $1.4 trillion, soon surpassing Social Security as the largest single expenditure.
- The 30-year Treasury was issued at a yield of 5.126%, the highest in 25 years, while US stocks hit record highs the same day, highlighting market distortions; the 5-year Treasury yield would need to fall below 3.25% to reverse the trend of rising debt interest costs, but that is nearly impossible in the near term.
- Corporate bond supply has surged 61% year-over-year, with AI-related bond issuance around 12 times the annual average from 2015 to 2024, reaching $269 billion year-to-date; the flood of corporate bonds is structurally crowding out long-term Treasury buyers, driving a bearish steepening of the yield curve.
- Hartnett proposes four allocation principles: ABB (Anything But Bonds), ABD (Anything But the Dollar), AI (All-In on AI); the core logic is that policymakers view nominal GDP growth as the way out of the debt problem and treat the stock market as "too big to fail."
- Going long gold is the best hedge against dollar depreciation, bond market collapse, and asset inflation; the signal of a weakening dollar is clear, and the US is signaling through yen intervention that it does not want the 10-year yield to break above 5%.
- Under the "Anything But Bonds" framework, long-duration assets such as REITs, biotech, regional banks, and small caps are quietly outperforming the broader market, with the market pricing in a peak in yields; the next major upside move is considered "too dangerous to be allowed."
- The contrarian trade under the "All-In on AI" framework is shorting AI bonds, as over $1 trillion in capital expenditure combined with negative free cash flow means AI companies must continuously issue debt on a massive scale; key catalysts include the September FOMC meeting (35% probability of a rate hike) and the Bank of Japan meeting (74% probability of a rate hike).
Original Author: Long Yue
Original Source: Wallstreetcn
The U.S. national debt is just $65 billion away from $40 trillion. As of Friday's close, this "largest round-number milestone in history" was within reach. In the latest edition of the Flow Show report, BofA Chief Investment Strategist Michael Hartnett titled the piece "Strife Begins at Forty," framing this moment as the market's most central narrative.
Hartnett noted that U.S. debt will not only break through $40 trillion in the coming days, but will also surge toward $50 trillion around 2029. In such an environment, Hartnett believes that being long gold is the optimal play right now, as gold remains the best tool for hedging against dollar depreciation, bond market collapse, and asset inflation.
Debt Interest Has Become the "Largest Expense," Putting Pressure on the Bond Market
Over the past 12 months, U.S. debt interest payments have reached $1.4 trillion, approaching Social Security to become the federal government's largest single expenditure.
Hartnett made it clear that this trend will not reverse—unless the 5-year Treasury yield falls below 3.25%. And without a major deflationary shock or recession, that is nearly impossible.
Meanwhile, the 30-year Treasury was issued at a yield of 5.126% last week, the highest in 25 years. Hartnett summed up the absurdity in one sentence: "Stocks hit record highs the same day, while Treasuries were issued at the highest yield in 25 years—that's reality."
The AI Funding Frenzy Is "Crowding Out" Treasury Buyers
The pressure on the bond market doesn't just come from the government. Data from Nomura strategist Charlie McElligott shows:
- Total corporate bond supply surged 61% year-over-year
- Issuance of AI/hyperscale data center/data center-related bonds (investment grade + loans) has reached roughly 12 times the annual average from 2015 to 2024, totaling $269 billion year-to-date—double the full-year figure for 2025
The flood of corporate bonds into the market is structurally steepening the Treasury yield curve (bear steepening), crowding out the capital that would otherwise buy long-dated Treasuries. CTA trend strategies hold an overall "short" signal on G10 bonds, with nominal positioning at the 12th percentile since 2010 and short-term rate positioning at the 10th percentile.
The result is a vicious cycle: credit spreads widen → long-duration buyers are crowded out → the yield curve bears steepens → market fears of "losing control" intensify.
Asset Allocation Principles: Gold Is the Core Answer
In the report, Hartnett reiterated several of his asset allocation frameworks for the 2020s and further strengthened them for 2026:
ABB (Anything But Bonds), ABD (Anything But Dollars), AI (All-In on AI).
These four principles share a common logic: policymakers see "nominal GDP prosperity" as the way out of the debt problem and view the stock market as "too big to fail." That's why Hartnett wrote last week: "Wall Street is trading without fear."
His summary of current market sentiment: "Huge EPS growth, $10 trillion in wealth added in 2026, over $1 trillion in AI capex in 2027... The door is wide open for bulls. The only constraints are bonds (yields surging), voters (the socialist wave), and the fact that everyone is already positioned to the upside."
Going Long Gold: The Optimal Solution Against Dollar Depreciation
Under the "ABD (Anything But Dollars)" framework, Hartnett gave a clear trading direction: go long gold.
His logic is straightforward: gold remains the best hedge against dollar depreciation, bond market collapse, asset inflation, and the political tug-of-war between capitalist populism and socialist populism in the 2020s.
The logic for a weaker dollar is equally clear. The U.S. government has already signaled through yen intervention that it doesn't want the 10-year Treasury yield to break above 5%. And with midterm elections approaching, CPI is expected to run in the 2.8%-3.6% range, with core CPI at 2.1%-2.6%, leaving policymakers with limited tolerance for higher yields.
Hartnett believes that Warsh's hawkish stance at the Jackson Hole meeting on August 28, combined with a potential rate hike by the Bank of Japan on September 18, could jointly deliver a "mission accomplished" signal, providing justification for suppressing yields and ending the yen depreciation risk.
Under the "Anything But Bonds" Framework, Which Assets Are Quietly Outperforming?
Under the "ABB (Anything But Bonds)" framework, Hartnett pointed out an interesting phenomenon: despite higher yields in 2026, those long-duration assets that were previously neglected—REITs, biotech (XBI), regional banks (KRE), small caps—are quietly outperforming the broader market.
The market is "pricing in" a peak in yields through its actions. Hartnett believes that the next sharp move higher in yields would be "too dangerous to be allowed" by the authorities, which is exactly why these assets are finding support.
The Other Side of the AI Trade: Shorting AI Bonds
Under the "All-In on AI" framework, Hartnett proposed a contrarian trade: short AI bonds.
The logic: more than $1 trillion in capital expenditures combined with negative free cash flow means AI companies must continuously issue debt on a massive scale. Hartnett first proposed this trade in late 2025, saying it's "far more profitable" than being long AI stocks in 2026.
He believes the optimal bubble strategy is to simultaneously go long "arrogance" (AI) and "humiliation" (neglected cyclical assets). Historical analogies: emerging markets in the 1999 internet bubble, and oil during the 2007/08 subprime/China bubble—both were "humiliation assets" that benefited in the late stages of a bubble.
Key Upcoming Catalysts: Elections and Policy Are the Biggest Variables
Hartnett listed the key market events for the coming months:
- August 28: Warsh speaks at Jackson Hole
- September 4: August nonfarm payrolls
- September 11: August CPI data
- September 16: FOMC meeting (35% probability of a rate hike)
- September 18: Bank of Japan meeting (74% probability of a rate hike)
- September 24: Major China-U.S. diplomatic event
- October 4: Brazilian elections
Hartnett's final assessment is clear: if Republicans hold the Senate and Abbott holds the Texas governorship, stocks (especially the AI sector) are expected to push further into bubble territory by 2027; if Democrats win the Senate and the Texas governorship on November 3, stocks, the dollar, and bond yields will face a decline of more than 10% by year-end.
