Top Bank of America strategist says the long bond is nearing the key line in the sand

By Jules Rimmer

Michael Hartnett says his recommendation last year to buy the 30-year Treasury is his 'lowest conviction call'

The real challenge to markets would come from Treasury bonds selling off, says a Bank of America strategist.

Investors are running away from the dollar into gold and other assets, but the real Rubicon for markets is the long bond, according to Bank of America chief investment strategist.

In an exclusive interview with MarketWatch, Hartnett said the U.S. Treasury can't let the yield on the 30-year bond BX:TMUBMUSD30Y exceed 5%, which isn't too far away from the 4.88% it's at right now.

Hartnett argues that if the Treasury were to lose control of the long end of the Treasury curve because of a buyers' strike by international investors, rising inflation expectations or a loss of confidence in the dollar, then this could cause major disruption.

One crucial indicator for the market that Hartnett is following closely is the Merrill Option Volatility Estimate Index, or MOVE, a measure of volatility in the bond market. This is currently at multi-year lows as the bond market has been relatively stable since the chaos of April 2025.

"There are several factors that could cause a disruptive spike here: excessive fiscal or monetary stimulus, a willingness to allow the dollar to devalue," he said. He added a further attack on Fed independence also could have that impact.

Hartnett believes Treasury Secretary Scott Bessent will pull out all the stops to keep volatility subdued and yields manageable by whatever means available: "direct market interventions, quantitative easing, yield curve control, a revaluation of America's gold reserves... whatever."

Last May, Hartnett made, what was at the time, a fairly punch call to buy the U.S. Treasury 30-year bond when it topped 5% and he has persevered with that, enjoying limited success. At this stage, his conviction is less solid. "It's my lowest conviction call," he admits.

If the long end "breaks" it could trigger massive capital flight, but for the moment, this is a very good hedge on all the things in the world that are at record highs, be it stocks, gold, crypto or international markets.

One factor persuading Hartnett to run his long bond call for now is that he believes economists got inflation wrong last year, and he thinks they'll overestimate it again this year. He thinks "the labor market is weaker than people give it credit for."

Hartnett said he's bearish on the U.S. dollar DXY, which already has dropped 11% over the last 52 weeks.

Michael Hartnett's concerns about U.S. stocks coming into the year have largely materialized.

"It could go a lot further," he says. International investors "want to reduce their exposure and that's why people are running to gold , they want resources, they want oil, they want metals."

Investors are playing the inflationary boom this way, and that's one of the reasons behind the strength in emerging markets too, he says.

Gold (GC00) on Thursday soared past $5,500 as oil (CL00) rallied as well. The iShares MSCI Emerging Markets ETF EEM has already gained 11% this year.

Asked about whether he's seeing institutional investors turn away from the U.S. toward emerging markets, he says that many fund managers can explain away one year of underperformance, of having missed out on a trend that reversed several years of lackluster returns.

However, international and emerging markets have started 2026 strongly and missing the boat for a second consecutive year will be much harder to justify. If, toward the end of the first half, emerging markets are still delivering superior returns, he thinks institutions will have to reconsider and chase the wave.

Hartnett's view on inflation is also informed by what he perceives as a policy panic that was kickstarted by the Republican party faring badly in elections last November. Hartnett believes Trump will be trying to repress prices of consumer goods, whether it's gasoline, drugs, electricity or houses, partly by personally leaning heavily on the executives of these companies.

Hartnett is a firm believer that this will be the year of the small RUT and mid-cap stocks MDY then, perhaps insulated from some of the pricing pressures Trump may impose, that will be the beneficiaries of the rotation away from the megacap tech sector.

Last year, Hartnett began referring to the Lag 7 rather than the Mag 7 MAGS to describe their underperformance, and this year he views them as "old-fashioned, monopolistic" and in some ways to be treated as "defensives these days."

-Jules Rimmer

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