US national debt nears $40 trillion, Bank of America’s Hartnett: Going long on gold is currently the optimal solution

The U.S. national debt is only $65 billion away from $40 trillion. By last Friday’s close, this record-breaking milestone was within reach. Bank of America’s Chief Investment Strategist, Michael Hartnett, titled his latest "Flow Show" report "Strife Begins at Forty," declaring this moment as the central narrative driving current market sentiment.

Hartnett points out that not only will the U.S. national debt surpass $40 trillion in the coming days, but it is also likely to surge towards $50 trillion by around 2029. In this environment, Hartnett believes that going long on gold is the best choice right now, as gold remains the best tool to hedge against dollar devaluation, bond market collapse, and asset inflation.

Debt Interest Payments Now "Number One Expenditure," Bond Market Under Pressure

Over the past 12 months, U.S. debt interest payments have reached $1.4 trillion, closing in on surpassing Social Security to become the federal government’s single largest expenditure.

Hartnett makes it clear that this trend will not reverse—unless the 5-year U.S. Treasury yield drops below 3.25%. However, without a major deflationary shock or recession, this is nearly impossible.

Meanwhile, the 30-year U.S. Treasury was issued last week at a yield of 5.126%, marking a 25-year high. Hartnett summarizes this absurdity in one sentence: “U.S. equities hit all-time highs on the same day Treasuries are issued at the highest yield in 25 years—this is reality.”

AI Financing Frenzy "Crowding Out" Treasury Buyers

The pressure on the bond market isn’t just from the government. Data from Nomura strategist Charlie McElligott shows:

• Total corporate bond issuance has surged 61% year-over-year

• AI/hyperscale data center/data center-related bonds (investment grade + loans) issuance has already reached about 12 times the 2015-2024 annual average, totaling $269 billion year-to-date, double the full-year level expected for 2025

A flood of corporate bonds is structurally steepening the U.S. Treasury yield curve (bear steepening), crowding out funds that otherwise would have gone to long-term Treasuries. CTA trend strategies are signaling a net "short" in G10 bonds, with nominal positions at the 12th percentile since 2010, and short-term rate exposures at the 10th percentile.

The result is a vicious cycle: wider credit spreads → long-duration buyers being crowded out → bear steepening of the yield curve → intensifying market concerns about the situation "running out of control."

Asset Allocation Principle: Gold as the Core Answer

Hartnett reiterates in his report his framework for asset allocation in the 2020s, with a further emphasis in 2026:

ABB (Anything But Bonds), ABD (Anything But Dollar), AI (All In on AI), etc.

The common logic behind these principles: decision-makers see "nominal GDP boom" as the way out of the debt dilemma, and the stock market as "too big to fail." As a result, Hartnett wrote last week: "Wall Street is trading without any fear."

His summary of current market sentiment: "Massive EPS growth, $10 trillion in new wealth by 2026, over $1 trillion in AI capital expenditures in 2027… the bull case is wide open, with the only constraints being bonds (soaring yields), voters (socialist wave), and the fact that everyone is already betting on upside."

Long Gold: The Best Way to Counter Dollar Depreciation

Within the "ABD (Anything But Dollar)" framework, Hartnett gives a clear trading direction: go long on gold.

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

The rationale for a weaker dollar is also clear. The U.S. government has already signaled through yen exchange rate intervention that it does not want the 10-year Treasury yield to break above 5%. And as the midterm elections approach, CPI is expected to run in the 2.8%-3.6% range, with core CPI at 2.1%-2.6%, meaning policymakers’ tolerance for higher yields is limited.

Hartnett believes that the hawkish remarks by Warsh at the August 28 Jackson Hole meeting, combined with a possible Bank of Japan rate hike on September 18, may together send the "mission accomplished" signal, providing the rationale to cap yields and end yen devaluation risk.

Under the "Anything But Bonds" Framework, Which Assets Are Quietly Outperforming?

Within the "ABB (Anything But Bonds)" framework, Hartnett points out an interesting phenomenon: although yields are expected to rise by 2026, those long-duration, previously neglected assets—REITs, Biotech (XBI), Regional Banks (KRE), and Small Caps—are quietly outperforming the broader market.

The market is "pricing in" a yield peak through its actions. Hartnett believes the next wave of sharply higher yields is "too dangerous to be permitted" by authorities, which is why these assets are supported.

The Other Side of the AI Trade: Shorting AI Bonds

Within the "All In on AI" framework, Hartnett presents a counterintuitive trade: short AI bonds.

The logic: Over $1 trillion in capital expenditures combined with negative free cash flow means AI companies must continuously issue large amounts of debt. This is a trade Hartnett first proposed for the end of 2025, stating it will be "far more profitable" than going long on AI stocks in 2026.

He argues that the optimal bubble strategy is to simultaneously go long on "arrogance" (AI) and "humiliation" (neglected cyclical assets). Historically: in the late stage of the 1999 internet bubble, emerging markets benefited; in the 2007/08 subprime/China bubble, oil was a winner—these were all "humiliation assets" benefiting at the bubble’s end.

Key Events Ahead: Elections and Policy Are the Biggest Variables

Hartnett lists these key market events in the months ahead:

• August 28: Warsh speaks at Jackson Hole

• September 4: August Nonfarm Payrolls

• September 11: August CPI data

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

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

• September 24: Major US-China diplomatic event

• October 4: Brazil Election

Hartnett’s final judgment is clear: if Republicans hold the Senate and Abbott retains the Texas governorship, the stock market (especially the AI sector) is likely to rally further into bubble territory by 2027; if Democrats win both the Senate and Texas governor on November 3, stocks, the dollar, and bond yields could face a significant correction of over 10% before year-end.