With the national debt nearing $40 trillion, Bank of America has a warning for bond investors

U.S. national debt is nearing $40T (about $39.9T mid-August) and could top it this week, with Bank of America strategist Michael Hartnett warning the “Anything but Bonds” trade remains in place. Treasury yields are already elevated—10-year at 4.6% and 30-year at 5.2%—while the federal government borrowed $1.8T in the first 10 months of FY2026 (including $432B in July), pushing the annual interest bill to about $1.4T. Hartnett argues long-duration Treasurys stay unattractive until the 5-year yield falls below ~3.25%, implying higher borrowing costs could weigh on mortgages, corporate credit, and spending.

Analysis

This is less a bond call than a duration-tax regime call. The market mechanism is a rising term premium: when the sovereign must keep absorbing demand through heavier issuance, the marginal buyer demands more yield, and that pressure bleeds directly into long-duration assets, mortgage spreads, and rate-sensitive multiples. The first-order winner is not necessarily Treasurys with the highest coupon; it is real assets and cash-flow streams whose valuation is not anchored to discount-rate fragility.

The cleanest second-order loser is the long-duration equity complex: VNQ/XLRE, utilities, and unprofitable growth get hit through WACC expansion, while housing-linked names face a double squeeze from affordability and refinancing costs. For BAC, the setup is mixed: higher rates can help NII at the margin, but the more important effect is balance-sheet optics and credit drag if CRE and consumer delinquencies reprice into a slower economy. That makes large banks more of a relative-value trade than a clean directional long.

Catalyst path: over days, auction tails and refunding commentary drive the tape; over 1-3 months, the key is whether supply is absorbed without a step-up in term premium; over 6-18 months, refinancing of the sovereign itself becomes the story if fiscal deficits stay sticky. The thesis breaks if growth rolls over hard and the Fed reasserts a lower-rate backstop, or if 5-year yields fall back below roughly 3.25% and the market stops paying for fiscal risk. The contrarian miss is that this can stay "bad for bonds" longer than consensus expects without immediately becoming "bad for equities."

Key Decisions for Investors

• Long GLD / short TLT for 1-3 months: best expression of fiscal-dominance stress if auction demand stays soft and long-end yields remain elevated; stop if 10y yields fall back below ~4.2% on a growth scare.
• Short VNQ or XLRE over 1-3 months: duration-sensitive REITs should lag if the 30-year yield stays above 5%; cover if the Fed signals a credible pivot or mortgage rates compress sharply.
• Use BAC only as a relative-value barometer, not a standalone macro short: if you want bank exposure, prefer XLF over single-name BAC and size it only if NII is improving without a rise in charge-offs; avoid if deposit betas or CRE losses accelerate.
• Watch the next Treasury refunding/auction cycle as a catalyst alert, not a trade by itself: a weak bid-to-cover or larger-than-expected coupon supply would extend the term-premium move and favor duration shorts.
• Set a tactical reversal trigger: if 5-year yields break below 3.25% or 10-year yields move sustainably under 4%, close rate-sensitive shorts and reassess the whole 'anything but bonds' regime.