BofA Chief: U.S. Debt Nearing $40 Trillion, Long Gold the Best Trade, AI Bond as Counterintuitive Short Target

In news on August 17, Michael Hartnett, Chief Investment Strategist at Bank of America, identified the approaching $40 trillion mark in U.S. debt as the core narrative of the current market in his latest "Flow Show" report. He expressed his views on this topic under the title "Forty Winks" (a play on the phrase "Forty is the beginning of worries"). Over the past 12 months, U.S. debt interest payments have reached $1.4 trillion, nearing surpassing Social Security as the largest single federal government expenditure. Last week, the 30-year U.S. Treasury bond was issued with a record high yield of 5.126%.

Hartnett pointed out that unless the 5-year U.S. Treasury yield falls below 3.25%, the deteriorating trend in interest payments will not reverse, which is highly unlikely to happen without significant deflationary shocks or a recession. He summarized the absurdity of reality in one sentence: "U.S. stocks hit an all-time high on the same day U.S. bonds were issued at a 25-year high yield." In an asset allocation framework that steers clear of bonds, stays away from the dollar, and fully embraces AI, Hartnett explicitly listed going long on gold as the optimal solution to combat dollar depreciation, bond collapse, and asset inflation. He also proposed a counterintuitive trade — shorting AI bonds. The logic behind this is the overlay of over $1 trillion in capital expenditure with negative free cash flow, forcing AI companies to continuously issue large-scale debt financing, making this trade much more profitable than being long on AI stocks.

Nomura strategist data confirms the pressure in the bond market: AI and data center-related bond issuances have reached approximately 12 times the annual average level from 2015 to 2024, standing at $269 billion year-to-date, which is twice the amount for the full year of 2025. Corporate bond inflows are structurally steepening the U.S. bond yield curve, crowding out long-duration Treasury buyers. Hartnett also noted that long-duration neglected assets such as REITs, biotech, regional banks, and small-cap stocks are quietly outperforming, with the market pricing in a "peak yield" scenario. Key future market milestones include Fed Chair's speech at Jackson Hole on August 28, the September FOMC meeting, and the Bank of Japan meeting.

The final assessment indicates that if the Republican Party retains the Senate and the Texas governorship, the stock market, especially the AI sector, will further surge to bubble levels by 2027. However, if the Democratic Party wins on November 3, the stock market, the dollar, and bond yields will face a significant drop of over 10% by the end of the year.