Bank of America`s Hartnett warns: If Bessant fails to control long-term interest rates, a sharp drop in the dollar and asset sell-offs will follow.

Hartnett warns that if Bessant fails to push the 30-year US Treasury yield below 5%, the dollar will fall sharply, and the market will shift towards shorting risk assets, leverage (AI massive computing power, private credit), and cyclical assets (financial stocks). Hartnett holds a bullish stance on gold and less popular long-duration assets, describing the extreme nature of the current policy bet as "success is expected, failure is unimaginable."

U.S. Treasury Secretary Bessenter announced last week that the U.S. would double the size of its long-term Treasury bond repurchase program, a move described by Bank of America's chief investment strategist Michael Hartnett in his latest Flow Show report as "quasi-quantitative easing." Meanwhile, the total U.S. national debt surpassed $40 trillion for the first time and continues to climb at a rate of $1 trillion per quarter.

Hartnett bluntly stated that Bessant's "3-3-3" economic framework has failed to meet all three indicators, and the policy's credibility is being reflected in the weakening of both the bond and currency markets— "Rising yields and a weakening currency mean that credibility is declining."

He judged that this round of "quasi-QE" should be able to suppress interest rates temporarily, but it cannot truly lower US Treasury yields. If the 30-year US Treasury yield fails to fall below 5%, the US dollar will face a sharp decline, and the market will experience a systemic sell-off of risk assets. The market will shift towards shorting risk assets, shorting AI massive computing power, private lending, and shorting financial stocks. Meanwhile, Hartnett maintains a bullish stance on gold and less popular long-duration assets.

The "3-3-3" plan: Three arrows fired simultaneously, all three arrows failing.

When Bessant took office at the end of 2024, he proposed a “3-3-3” economic framework with 2028 as the target node. The three core objectives are: an average annual growth rate of 3% in real GDP, a reduction of the federal fiscal deficit as a percentage of GDP to 3%, and an increase of 3 million barrels per day in domestic oil production.

According to data disclosed in Hartnett's report, all three metrics have failed to meet expectations:

• GDP growth: The average growth rate over the past six quarters has been less than 2%.
• Fiscal deficit: Currently at approximately 6% of GDP, double the target value.
• Oil production: has increased by only about 300,000 barrels per day since 2024, achieving only one-tenth of the target.

Hartnett points out that policy credibility has historically been measured by the bond and foreign exchange markets. The failure of all three targets is the underlying reason for the current high yields on US Treasury bonds and the pressure on the US dollar.

Three "Maginot Lines": $4 oil price, $160 against the Japanese yen, and 5% US Treasury yield.

Hartnett describes the current policy focus as defending three "Maginot Lines": gasoline prices not exceeding $4 per gallon, the dollar-yen exchange rate not exceeding 160, and 10-year and 30-year Treasury yields not exceeding 5%. He believes that if these three lines are breached, it will pose a direct threat to economic growth, the AI investment boom, and asset bubbles.

However, the reality is not optimistic. Hartnett pointed out in its report that U.S. gasoline prices have risen again to over $4 per gallon (a significant increase from $3 per gallon before the war). With the ongoing U.S.-Iran "economic war" and U.S. crude oil inventories and strategic petroleum reserves at 40 to 50-year lows, the downside potential for oil prices is extremely limited.

Regarding exchange rates, Hartnett believes that US-Japan currency intervention requires the Bank of Japan to raise interest rates substantially on September 18 in order to stabilize long-term Japanese interest rates and reduce the risk of Japan selling off US Treasury bonds.

The most crucial line of defense is to keep the yield on long-term US Treasury bonds below 5%—this is directly related to whether a credit event for the US government can be avoided (first, rating agencies downgrade the rating, and second, the potential failure of a Treasury bond auction), and also to whether the financing cost of AI can be kept at a controllable level.

Why a "quasi-QE"? The dual pressures of 40 trillion yuan in debt and AI financing.

In his report, Hartnett outlined the three underlying reasons why the Treasury Department was forced to intervene:

First, the debt level has reached a historical threshold. The total U.S. national debt has just surpassed $40 trillion and continues to expand at a rate of about $1 trillion per quarter.

Second, net issuance of Treasury bonds is squeezing corporate financing. Net issuance of US Treasury bonds is projected to reach $2 trillion in both 2026 and 2027, directly impacting the corporate bond market. Meanwhile, AI-related bond issuance has already reached $200-300 billion this year, and the AI arms race has been listed as the US government's top national security and macroeconomic priority.

Third, the divergence between data and the market triggered a crisis of confidence. Hartnett pointed out that when non-farm payrolls showed zero growth and inflation was zero, the yield on 30-year US Treasury bonds rose to a 20-year high, which means that market confidence in fiscal sustainability has been fractured, and "public trust must be rebuilt immediately."

It is against this backdrop that Bessant has launched a series of "put option"-style policy interventions: signing dollar swap agreements with Asian and Gulf countries, intervening in the yen's foreign exchange market, and now, with the Federal Reserve's tacit approval, doubling the scale of long-term Treasury bond repurchases. Hartnett characterizes this series of actions as "fixing policy panic in the fixed income market."

He also cautioned that panic-driven fiscal intervention would require Federal Reserve Chairman Warsh to make a "just right hawkish" statement at the Jackson Hole conference on August 28—neither too dovish to avoid further pressure on the dollar, nor too hawkish to avoid suppressing the market.

Success is expected; failure is unimaginable.

Hartnett summed up the extreme nature of the current situation in one sentence: "Success is expected, failure is unimaginable."

His logic is that QE was the starting point of the post-Lehman era bull market and the foundation of Wall Street's "too big to fail" narrative. The unconventional monetary stimulus of the past 20 years has led to unconventional increases in asset prices. Therefore, a new round of "quasi-QE" should be expected to be successful.

But he then provided a clear roadmap for the failure scenario:

"If Bessant's 'Panic Twist Operation' fails to push the 30-year yield below 5%, it will mean a sharp drop in the dollar and a shift in asset allocation—shorting risky assets, shorting leverage (AI hypercomputing companies, private credit), and shorting cyclical assets (financial stocks) until the midterm elections."

Against this backdrop, Hartnett's long positions are concentrated in gold, as well as long-term assets that have been neglected by the market , including REITs, biotech ETFs, regional banks, small-cap stocks and Hong Kong real estate.