US Debt Nears $40 Trillion; BofA's Hartnett: Going Long Gold Is the Optimal Strategy

The US national debt is just $65 billion away from hitting $40 trillion. As of last Friday's close, this "largest integer threshold in history" is within reach. In the latest edition of his "Flow Show" report, titled "Strife Begins at Forty," Michael Hartnett, Chief Investment Strategist at Bank of America, identified this moment as the core narrative driving current markets.

Hartnett pointed out that US national debt will not only break through the $40 trillion mark in the coming days but is also projected to surge toward $50 trillion by around 2029. In such an environment, Hartnett believes that going long gold is the optimal strategy, as gold remains the best tool for hedging against US dollar depreciation, bond market collapse, and asset inflation.

Interest on Debt Has Become the "Largest Expense," Putting Pressure on the Bond Market

Over the past 12 months, interest payments on US debt have reached $1.4 trillion, approaching the point where it will surpass Social Security to become the federal government's largest single expenditure.

Hartnett explicitly stated that this trend will not reverse unless the yield on 5-year US Treasuries falls below 3.25%. This is nearly impossible without a major deflationary shock or recession.

Meanwhile, 30-year US Treasuries were issued last week with a yield of 5.126%, hitting a 25-year high. Hartnett summarized this absurdity in one sentence: "US stocks hit record highs on the same day that US Treasuries were issued at their highest yield in 25 years—this is reality."

The AI Financing Frenzy Is "Crowding Out" Treasury Buyers

Pressure on the bond market is not coming solely from the government. Data from Nomura strategist Charlie McElligott shows:

• Total corporate bond supply surged 61% year-over-year

• The issuance volume of bonds (investment-grade + loans) related to AI/hyperscale data centers/data centers has reached approximately 12 times the annual average level from 2015-2024, totaling $269 billion year-to-date, which is twice the full-year total for 2025

The influx of a large volume of corporate bonds into the market is structurally steepening the US Treasury yield curve (bear steepening), crowding out capital that would otherwise purchase long-term Treasuries. CTA trend strategies are showing an overall "short" signal for G10 bonds, with nominal positions at the 12th percentile since 2010, and short-term rate positions at the 10th percentile.

The result is a vicious cycle: widening credit spreads → long-duration buyers are crowded out → bear steepening of the yield curve → intensified market concerns about things getting "out of control."

Asset Allocation Principles: Gold Is the Core Answer

In his report, Hartnett reiterated his major asset allocation frameworks for the 2020s, which he expects to strengthen further by 2026:

ABB (Away From Bonds), ABD (Away From Dollar), AI (All-in on AI), etc.

Behind these four principles lies a common logic: policymakers view "nominal GDP prosperity" as the way out of the debt problem and see the stock market as an entity that is "too big to fail." This is why Hartnett wrote last week: "Wall Street is trading without fear."

His summary of current market sentiment is: "Significant EPS growth, a $10 trillion increase in wealth by 2026, AI capital expenditures exceeding $1 trillion in 2027... the bull door is wide open, with the only constraints being bonds (soaring yields), voters (socialist wave), and the fact that everyone has already bet on the upside."

Going Long Gold: The Optimal Solution Against US Dollar Depreciation

Under the "ABD (Away From Dollar)" framework, Hartnett provided a clear trading direction: going long gold.

His logic is straightforward: gold remains the best hedging tool against US 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 US dollar is equally clear. The US government has signaled through intervention in the yen exchange rate that it does not want the 10-Year Treasury Yield to break above 5%. With the midterm elections approaching, CPI is expected to run in the 2.8%-3.6% range, and core CPI in the 2.1%-2.6% range, leaving policy makers with limited tolerance for rising yields.

Hartnett believes that Warsh's hawkish remarks at the Jackson Hole meeting on August 28, combined with a potential rate hike by the Bank of Japan on September 18, may jointly signal that the "mission is accomplished," providing justification for suppressing yields and ending the risk of yen depreciation.

Under the "Away From Bonds" Framework, Which Assets Are Quietly Outperforming?

Under the "ABB (Away From Bonds)" framework, Hartnett pointed out an interesting phenomenon: despite rising yields in 2026, long-duration assets that were previously neglected—REITs, Biotechnology (XBI), Regional Banks (KRE), and Small-Cap Stocks—are quietly outperforming the broader market.

The market is acting to "price in" peak yields. Hartnett believes that another significant surge in yields would be "too dangerous and would not be allowed to happen" by authorities, which is precisely why these assets are finding support.

The Other Side of the AI Trade: Shorting AI Bonds

Under the "All-in on AI" framework, Hartnett offered a counterintuitive trade: shorting AI bonds.

The logic is that over $1 trillion in capital expenditures plus negative free cash flow means AI companies must continue to raise funds through large-scale debt issuance. This trade, first proposed by Hartnett in late 2025, he stated, is "much more profitable" than going long AI stocks in 2026.

He believes the optimal bubble strategy is to go long both "arrogance" (AI) and "humiliation" (neglected cyclical assets). Historical analogies include emerging markets during the 1999 internet bubble and oil during the 2007/08 subprime/China bubble, where "humiliation assets" benefited in the late stages of the bubble.

Key Future Nodes: Elections and Policy 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 a rate hike)

• September 18: Bank of Japan meeting (74% probability of a rate hike)

• September 24: Major diplomatic event between China and the US

• October 4: Brazilian general election

Hartnett's final judgment is clear: If the Republicans hold the Senate and Abbott retains the governorship of Texas, the stock market (especially the AI sector) is expected to rise further to bubble levels in 2027; if the Democrats win the Senate and the Texas governorship on November 3, the stock market, the US dollar, and bond yields will face a sharp decline of over 10% by year-end.