Bank of America chief investment strategist Michael Hartnett says it's time to "buy humiliation and sell hubris," and nowhere is that more relevant than in the long-end of the U.S. Treasury market, following weeks of sharp selloff.
In his latest "The Flow Show" published Friday, Hartnett made a bold contrarian call: 30-year U.S. Treasury bonds, now yielding above 5%, have become a cyclical buying opportunity.
Despite mounting fiscal pressures, soaring inflation, and rising interest costs, the expert indicated that the worst may be priced in — and that the return of bond vigilantes could soon start working in favor of long-duration debt.
The Bond Market’s Fall From Grace
"The 10-year return from U.S. Treasuries is now as humiliatingly negative as stock returns in February 2009 or commodities in June 2018," Hartnett said, highlighting that long bonds are currently the most out-of-favor asset on Wall Street.
Year-to-date, 30-year Treasuries – as tracked by the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) – are down 3.8%, compared to gains of 25% for gold, 13% for international stocks, and 4.5% for U.S. government bonds overall.
The U.S. dollar is down 7.9%, while oil is off by more than 15%.
Adding to the irony, Microsoft Corp. (NASDAQ:MSFT) short-dated corporate bonds now yield less than Treasuries, while the yield spread on 30-year maturities has narrowed to just 20 basis points — the tightest level ever recorded.
Fiscal Policy Flashing Red
Hartnett says the current path of U.S. fiscal policy is unsustainable. Over the past 12 months, the federal government spent $7.1 trillion — an average of $225,000 per second. Interest payments on federal debt have ballooned to $1 trillion annually, and the debt ceiling will need to rise by $4 trillion this year just to keep up.
The 2020s combination of Biden's Build Back Better spending and Trump's Big Beautiful Bill tax plans, Hartnett said, "do not a AAA-rating make."
“US federal budget deficit has averaged 9% of GDP past 5 years, is forecast by Moody’s to still be running a 9%-of-GDP deficit in 2034,” Hartnett added.
Why This Is A Contrarian Buy
Despite all the bearish sentiment, Hartnett believes the catalysts for the bond bear market are well known and mostly priced in.
Inflation is already up 25% since 2020, the Fed has paused rate cuts, and the U.S. fiscal position is widely acknowledged as unsustainable.
He sees the 5% level on 30-year Treasuries as a red line — a level that could incentivize buying from bond vigilantes seeking to enforce fiscal discipline. Importantly, yields above this threshold are negative for a financialized U.S. economy and create headwinds for growth.
Hartnett pegs the "magic number" at a 5-year yield of 3.25% — above that, interest payments explode; below it, they stabilize.
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