By Jules Rimmer

Investors are shying away from bonds for a reason, says BofA

The national debt could hit $50 trillion by July 2029

In the coming days the U.S. national debt is set to breach $40 trillion for the first time.

Soberingly, Bank of America's chief equity strategist Michael Hartnett predicts that the milestone of $50 trillion will be reached in July 2029. These worrying landmarks reinforce a market perception that fixed-income investments are losing bets, a sentiment Hartnett summarizes as "Anything But Bonds."

It's not a milestone so much though, as a millstone. In his weekly Flow Show strategy note published Friday, Hartnett calculates that the cost of servicing the interest on that debt has reached $1.5 trillion yearly. Moreover, unless the yield on U.S. 5-year Treasurys BX:TMUBMUSD05Y falls to 3.25% or lower, that interest burden will continue rising.

U.S. national debt to surpass $40tn in coming days

Given the unpopularity of bonds, it "tracks," as Hartnett observes, that investors prefer to invest in stocks, especially buttressed by the notion that policymakers see explosive growth in nominal GDP as a solution to indebtedness (as the debt to GDP ratio improves). Investors also sense that equity markets are "too big to fail." The upshot, as Hartnett points out, is that "Wall Street trades with no fear."

The "Anything But Bonds" trope will only end, Hartnett contends, if Warsh signals hawkish at the Jackson Hole symposium Aug. 28, and both the Fed and Bank of Japan tighten monetary policy in September.

At the moment, Hartnett is recommending long-duration assets (companies whose cash flows will be generated way off in the future and therefore very sensitive to interest rate moves) such as biotech stocks XBI, real-estate investment trusts and regional banks KRE. That's because he (and investors too, given their recent outperformance) thinks yields will peak in coming quarters.

Another trope Hartnett identifies in asset allocation is "Anything But China." Weakness in Chinese equities CN:SHCOMP and real estate have been the "humiliation trade" of the 2020s, in his words, but he now spots capital heading back to China, attracted by growth of tech in Japan (NIY00), Taiwan XX:180909 and Korea KR:180721 and the AI boom in China. While ultimately Hartnett forecasts a big rotation from Chinese bonds BX:AMBMKRM-10Y to equities, for now, the early way to play that trend would be to buyHong Kong property stocks.

One remaining "Anything But" theme is the dollar. As the best hedge against dollar DXY debasement, bond collapse and asset inflation, Hartnett recommends gold (GC00), but notes also that a weaker dollar is generally beneficial to emerging markets EEM.

If you don't like the dollar then gold and emerging markets are themes to explore

When it comes to AI, Hartnett has been a longstanding advocate of shorting AI bonds simply owing to the huge weight of issuance that well north of $ 1 trillion of capex necessitates. He continues to recommend buying AI as an equity theme - the "hubris trade" of staying long AI stocks through the bubble.

One caveat, however: if the politics of AI, specifically the controversy surrounding the construction of data centers, turn unfavorable and their expansion is paused, then AI stocks could fall 10%, the dollar might tumble and bond yields come falling down too.

-Jules Rimmer

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08-14-26 0822ET