US Debt Approaches $40 Trillion, Bank of America’s Hartnett: Going Long on Gold is the Optimal Solution

Author: Long Yue
The US national debt is just $65 billion away from reaching $40 trillion. As of last Friday's close, this "historically significant integer milestone" is within reach. Michael Hartnett, Chief Investment Strategist at Bank of America, titled his latest report in the "Flow Show" series "Strife Begins at Forty," marking this moment as the core narrative of the current market.

Hartnett pointed out that the US national debt will not only surpass $40 trillion in the coming days but is also expected to surge towards $50 trillion by around 2029. In such an environment, Hartnett believes that going long on gold is the optimal solution, as gold remains the best tool to hedge against the depreciation of the dollar, bond collapse, and asset inflation.

Debt Interest Has Become the "Largest Expenditure", Bond Market Under Pressure

In the past 12 months, US debt interest payments have reached $1.4 trillion, nearing the point of surpassing Social Security to become the federal government's largest single expenditure.

Hartnett clearly stated that this trend will not reverse—unless the 5-year US Treasury yield falls below 3.25%. Without a significant deflationary shock or recession, this is nearly impossible.

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

AI Financing Frenzy is "Driving Out" Treasury Buyers

The pressure on the bond market is not only coming from the government. Nomura strategist Charlie McElligott's data shows:

• Corporate bond supply has surged 61% year-on-year.

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

A large influx of corporate bonds into the market is structurally steepening the US Treasury yield curve (bear steepening), pushing out the funds that should have been used to purchase long-term Treasuries. CTA trend strategies hold an overall "short" signal on G10 bonds, with nominal positions at the 12th percentile since 2010, and short-term interest rate positions at the 10th percentile.

The result is a vicious cycle: credit spreads widen → long-term buyers are pushed out → yield curve steepens → market concerns about "loss of control" intensify.

Asset Allocation Principle: Gold is the Core Answer

In the report, Hartnett reiterated several asset allocation frameworks for the 2020s and further reinforced them for 2026:

ABB (Away from Bonds), ABD (Away from Dollars), AI (All-in on AI), etc.

These four principles share a common logic: decision-makers view "nominal GDP prosperity" as a way to solve the debt problem and see the stock market as "too big to fail." For this reason, Hartnett wrote last week: "Wall Street is trading without fear."

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

Going Long on Gold: The Optimal Solution Against Dollar Depreciation

Within the framework of "ABD (Away from Dollars)," Hartnett provided a clear trading direction: go long on gold.

His logic is straightforward: gold remains the best hedge against dollar depreciation, bond collapse, asset inflation, and the political struggle between capitalist populism and socialist populism in the 2020s.

The logic behind a weaker dollar is equally clear. The US government has signaled through yen exchange rate interventions that it does not want the 10-year US Treasury yield to exceed 5%. As the midterm elections approach, the CPI is expected to run in the range of 2.8%-3.6%, with core CPI at 2.1%-2.6%, indicating limited tolerance for rising yields at the policy level.

Hartnett believes that the hawkish statements from Warsh at the Jackson Hole meeting on August 28, combined with the potential interest rate hike by the Bank of Japan on September 18, may collectively signal "mission accomplished," providing a basis for suppressing yields and ending the risk of yen depreciation.

Under the "Away from Bonds" Framework, Which Assets are Quietly Outperforming?

Within the "ABB (Away from Bonds)" framework, Hartnett pointed out an interesting phenomenon: despite rising yields in 2026, those long-duration assets that were previously neglected—REITs, biotechnology (XBI), regional banks (KRE), small-cap stocks—are quietly outperforming the market.

The market is pricing in the peak of yields through action. Hartnett believes that the next round of significant yield increases will be "too dangerous for authorities and will not be allowed to happen," which is why these assets are receiving support.

The Other Side of AI Trading: Shorting AI Bonds

Within the "All-in on AI" framework, Hartnett provided a counterintuitive trade: short AI bonds.

The logic is that over $1 trillion in capital expenditures combined with negative free cash flow means that AI companies must continuously issue large amounts of debt for financing. This trade was first proposed by Hartnett at the end of 2025, and he stated that it would be "much more profitable" than going long on AI stocks in 2026.

He believes that the optimal bubble strategy is to go long on both the "arrogant" (AI) and the "humiliated" (neglected cyclical assets). Drawing historical parallels: emerging markets during the 1999 internet bubble and oil during the 2007/08 subprime/China bubble were both beneficiaries of "humiliated assets" at the end of the bubble.

Key Future Nodes: 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 payroll data

• September 11: August CPI data

• September 16: FOMC meeting (rate hike probability 35%)

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

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

• October 4: Brazilian elections

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 further surge to bubble levels by 2027; if the Democrats win the Senate and the Texas governorship on November 3, the stock market, dollar, and bond yields will face a more than 10% significant decline by the end of the year.

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