'Buy Long Duration Bonds,' Says Bank Of America Strategist: 4 ETFs To Watch As Trump's Deficit Fight Unfolds

Investors may be underestimating Donald Trump‘s potential push for fiscal discipline, making long-term bonds and rate-sensitive sectors an attractive bet, according to Bank of America’s chief investment strategist Michael Hartnett.

In his flagship ‘The Flow Show’ report published Friday, Hartnett shifted to a bullish stance on bonds, stressing that the yield spike seen in recent months has created an opportunity.

“20-year corporate bonds now yielding 6.3%, pension funds would be looking to park some of those gains in bonds,” he said, recommending investors “buy long duration bonds.”

Hartnett indicated the case for duration bonds – as commonly tracked by the iShares 20+ Year Treasury Bond ETF TLT – is strengthening as U.S. government spending slows, the Federal Reserve keeps a cautious stance on inflation, and yields approach peak levels.

Is The Bond Bear Market Peaking?

The past two years have been brutal for fixed-income investors.

Higher-for-longer interest rates and rising deficits crushed bond prices, and since the Federal Reserve's 100-basis-point interest rate cuts, bonds have remained the worst-performing asset class.

Yet Hartnett sees the tide turning.

Historically, rolling 10-year returns from U.S. Treasuries have never been negative over the past 90 years. The market has reached what he calls the “peak in ‘anything but bonds’ trade of the 2020s.”

The technical backdrop also suggests stabilization. The 30-year Treasury yield has hit a double top at 5%, a level Hartnett believes represents strong resistance.

If yields retreat toward 4%, a diversified low-risk bond portfolio—comprised of Treasuries, investment-grade debt, high-yield bonds, and emerging market credit—could generate 11%-12% annualized returns, Hartnett highlighted.

A higher-risk allocation, with greater exposure to junk bonds and preferred securities, could yield up to 15%.

Trump's Fiscal Shift

As Hartnett highlighted, the U.S. budget deficit has risen to $7.3 trillion, fueling a 50% surge in nominal GDP, with government spending contributing significantly to economic growth.

Yet, according to the expert with the Fed prioritizing inflation control and Trump likely pushing for spending cuts, deficits could shrink, reducing upward pressure on yields.

“We say Trump’s need for ‘smaller government’ = ‘twin peak’ in 5% bond yields,” Hartnett said.

Scott Bessent, Trump's nominee for Treasury Secretary, made it clear during his Senate confirmation hearing on Thursday that tackling government spending will be a top priority.

“We have a spending problem,” he said, emphasizing the need for significant reductions in government outlays.

Bessent indicated runaway spending as a key reason he joined the Trump campaign, signaling his commitment to aggressive fiscal tightening.

“One of the things that got me out from behind my desk and my quiet life in this campaign was the thought that this spending is out of control,” Bessent said.

The Bond Market's Attractive Risk-Reward Profile

At current levels, the bond market presents what Hartnett describes as a “very good” risk-reward profile.

A scenario where yields drop 100 basis points (1 percentage point) could generate strong returns, while even a rise in yields may not severely dent total performance.

With yields near 5%, the worst may be over for bonds, according to Hartnett’s calculations.

Portfolio Type	Current Yield (%)	Duration	Convexity	1-Year Return (If Yields Drop 100bps)	2-Year Return (If Yields Drop 100bps)	1-Year Return (If Yields Rise 100bps)	2-Year Return (If Yields Rise 100bps)
Low-risk bond portfolio	5.7%	6.5	1.1	12%	17%	-1.0%	5%
High-risk bond portfolio	7.5%	7.0	0.9	15%	22%	0.4%	8%

Source: Bank of America

Which Sector ETFs Stand To Benefit?

Investors looking to position for lower yields should consider rate-sensitive exchange-traded funds.

Hartnett's report highlights opportunities in:

SPDR S&P Homebuilders ETF XHB: Lower mortgage rates could revive housing demand.
Utilities Select Sector SPDR Fund XLU: Defensive, dividend-paying stocks tend to outperform in a falling rate environment.
Financial Select Sector SPDR Fund XLF: Banks benefit from a steepening yield curve and deregulation.
SPDR S&P Biotech ETF XBI: Growth stocks, including biotech, typically gain as borrowing costs decrease.

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