Nobody wants bonds right now, and that's precisely why Michael Hartnett thinks they might be the best trade for 2026. Bank of America's chief investment strategist laid out his case this week for falling bond yields, though he admits Washington could sabotage the whole thing if Trump decides to open the fiscal spigots.

Speaking on a recent podcast, Hartnett explained that three factors support lower yields: awful positioning, deteriorating macro conditions, and supportive policy. But there's a political wildcard that could flip the script entirely.

When Nobody Wants Something, That's Usually the Trade

Here's the positioning problem: Bank of America's private clients manage roughly $4 trillion across their portfolios, yet they've parked just 4% in Treasurys while piling 66% into equities. That kind of lopsided allocation makes lower yields a textbook contrarian bet.

"We still think that the market is not positioned for lower bond yields," Hartnett said.

The macro picture supports his case too. Hartnett expects negative growth in Q4 2025 and the first half of 2026. The labor market is showing cracks, with youth unemployment hovering near 9%, and inflation appears headed toward 2% by mid-2026.

Policy could accelerate the move. The Federal Reserve is already cutting rates, and Hartnett believes the Trump administration would prefer lower yields and a weaker dollar to boost manufacturing and small-to-mid-cap companies.

"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 that scenario plays out, long-duration assets like the iShares 20+ Treasury Bond ETF (TLT) or the PIMCO 25+ Year Zero Coupon US Treasury Index ETF (ZROZ) could see substantial gains.

Peak Optimism Triggers Sell Signal

Bank of America's latest Global Fund Manager Survey shows investor sentiment at its most bullish level in over three years, with growth and earnings expectations hitting their highest marks since 2021.

Cash allocations have collapsed to 3.3%, the lowest reading since 1998, while equity and commodity exposure sits at levels not seen since early 2022. The firm's Bull & Bear Indicator jumped to 8.5, triggering a contrarian sell signal after massive equity ETF inflows.

Hartnett's response? Stay 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.

The $2,000 Question

The biggest threat to Hartnett's bond thesis isn't economic—it's political.

"The key here is how Trump really addresses his approval rating," he said.

If Trump decides to juice his popularity with aggressive fiscal stimulus, the entire bond rally could evaporate. Hartnett specifically mentioned the possibility of $2,000 stimulus checks as a scenario that would change everything.

"If that happens, inflation's up and interest rates will be up," he said.

He added that two things could derail lower yields in 2026: fiscal stimulus and an equity bubble. Either one pushes bond yields higher instead of lower.

So bonds look attractive—unless Trump decides Americans need another round of stimulus checks. In that case, all bets are off.