Here's an interesting political-economic theory: if inflation drops to 2% next year, President Donald Trump might see both his approval ratings and the bond market move in his favor. At least that's the view from Bank of America strategist Michael Hartnett, who's mapped out a scenario where politics and fixed income converge in unexpected ways.

Hartnett, who's built a reputation on contrarian market calls, laid out his thinking in his latest "The Flow Show" report. The premise is straightforward—voters care deeply about affordability, and the Consumer Price Index essentially functions as a political scorecard. Hit the Fed's 2% inflation target, and Trump's approval could climb above 45%, positioning Republicans favorably heading into the 2026 midterms. But if inflation lingers around 4%, his support might slip below 40%.

Why Long-Duration Treasuries Look Attractive Now

For investors willing to go against the crowd, Hartnett sees opportunity in an unloved corner of the bond market: long-dated zero-coupon Treasuries. He specifically highlights the PIMCO 25+ Year Zero Coupon U.S. Treasury ETF (ZROZ), which holds long-duration bonds that tend to surge when long-term interest rates decline.

This trade runs counter to the market's current preference for inflation protection. But if consumer prices actually do fall to 2%, these bonds could rally sharply as expectations shift and long-term rates drop.

There's even a potential catalyst that could accelerate the disinflationary trend: trade policy reversal. Hartnett suggests that political pressure to lower prices might force Washington to unwind tariffs and potentially end the U.S.-China trade war. Cheaper imports would help push consumer prices down further, adding momentum to the bond rally.

The Catch: Government Price Controls Could Squeeze Corporate Margins

Here's where things get complicated. Hartnett doesn't think inflation will fall to 2% through gentle market forces alone. Instead, he envisions a shift from what he calls the "invisible hand" to the "visible fist"—direct government intervention to suppress prices or boost supply in politically sensitive sectors.

That might achieve the inflation goal, but it could come at a cost to companies. Aggressive affordability policies could cap pricing power and compress margins, potentially leading to what Hartnett describes as "negative profit margins" in affected industries.

Which sectors are most vulnerable? Hartnett points to the traditional inflation beneficiaries—energy, housing, insurance, and utilities. These "whip inflation" sectors typically thrive when prices are rising, but could suffer if inflation cools and government policies limit their ability to pass costs along to consumers. In his contrarian scenario, these become sectors to short rather than own.