Market Isn't Positioned For Lower Bond Yields, But Trump's $2,000 Checks Could Change The 2026 Trade

The bond market looks deeply unloved heading into 2026, but Bank of America's chief investment strategist Michael Hartnett said that neglect could fuel a powerful rally ahead, unless Washington rewrites the script with extravagant fiscal stimulus. Speaking this week on a podcast, Hartnett said the case for lower yields rests on three pillars — positioning, macro deterioration, and policy — with an important political wildcard that could upend the thesis. “We still think that the market is not positioned for lower bond yields,” Hartnett said. Market Still Not Set For Lower Bond Yields, Hartnett Says Despite persistent debate about slowing growth, investors remain heavily skewed toward risk assets. Hartnett said Bank of America's private clients hold roughly $4 trillion across portfolios, yet just 4% is allocated to Treasurys, compared with 66% in equities. In his view, that imbalance makes lower yields a classic contrarian trade. Hartnett said the macro backdrop also supports bonds. "We’re going to have a negative quarter of growth in the fourth quarter of 2025, and I think in the first half of 2026," he said. He also highlighted labor market weakness, including elevated youth unemployment near 9% in the U.S., and inflation that’s headed toward 2% by mid-2026. Policy matters too. Hartnett said the Federal Reserve is already cutting rates, while the Trump administration would likely prioritize lower yields and a weaker dollar to support manufacturing, small-cap, and mid-cap firms. "You could see the 30‑year Treasury below 4% [yield] and the five‑year Treasury around 3% [yield] before the end of the first half," he said. If Hartnett’s forecasts prove right, long-duration asset like the iShares 20+ Treasury Bond ETF (NASDAQ:TLT) or the PIMCO 25+ Year Zero Coupon US Treasury Index ETF (NYSE:ZROZ) could stage a sharp rally. Investor Bullish Sentiment Hits Extremes: BofA Sell Signal Triggered The latest Bank of America Global Fund Manager Survey showed investor sentiment at its most bullish in more than three years, with expectations for growth and earnings at their highest since 2021. Cash allocations have fallen to 3.3%, the lowest since 1998, while exposure to equities and commodities is at its highest since early 2022. The firm's Bull & Bear Indicator has risen to 8.5, triggering a contrarian sell signal after large inflows into equity ETFs. Hartnett's preferred expression of the view is defensive. Bank of America is "not chasing risk-on consensus but playing lower CPI via long zero coupon bonds, mid caps, EM equities, and natural resources," according to the report. What Could Go Wrong? Hartnett said the biggest risk to his bond view is political. "The key here is how Trump really addresses his approval rating," he said. Hartnett warned that more fiscal stimulus could reverse the bond call. "For example, floating the idea of $2,000, stimulus checks," he said. "If that happens, inflation’s up and interest rates will be up." He added that fiscal stimulus and an equity bubble could push yields higher. "Fiscal stimulus and a bubble would be the two ways that you get a meaningful rise in yields in 2026," Hartnett said. Read Next: Trump‑Venezuela Conflict Odds Top 50% In Betting Markets — Time To Buy Cheap Oil? Photo: Shutterstock