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Hartnett: A Democratic Sweep Will Trigger A Stock Market Rout, And Pop The AI Bubble

Zero Rss
1 month ago
Hartnett: A Democratic Sweep Will Trigger A Stock Market Rout, And Pop The AI Bubble

The biggest story last week was not the unexpectedly hot jobs report which, unfortunately, will be revised sharply lower next month as the labor market reverts to its deteriorating, AI-enhanced, trendline: Instead, what everyone was - or should have been focusing on - was the bottom falling out of the bond market with global yields jumping to the highest level in 2 decades, to wit: 

  • 10Y Treasury yields jumping to 4.81%, near 2008 crisis levels
  • 30Y Treasury yields jumping to 5.31%, highest since 2007
     
  • Japan 10Y JGB  >3.0%    First time since 1996
  • Japan 30Y JGB  4.2%, or 4x the BoJ policy rate
     
  • German 10Y Bund  3.38%, post-2011 high
  • France OAT-Bund spread 88bps, 2012 crisis highs
  • Italy BTP-Bund spreads, 84bps, 2012 highs

A Bloomberg index of global bond yields just rose to the highest since 2007, and is just 1% away from the highest levels this century.

Appropriately, the topic of soaring bond yields is also the kick-off theme of the latest weekly Flow Show (available to pro subs) from BofA's Michael Hartnett, who writes that with a 99% probability the ECB hikes Sept 10th, 53% Fed hikes on 16th, 98% BoJ hikes 18th (per Bloomberg futures pricing), the hikes are coming fast and furious as central banks try to restore credibility to ward off surge in bond yields (which, as we have discussed extensively, is now the biggest threat to AI capex and the K-shaped consumer booms). In light of this, Hartnett says that if the Fed does hike despite stalled payrolls...

... then it will restore credibility and make sure the current "peak yields" don't go higher, it's also why to Hartnett, duration (RTY, XBI, KRE, REIT) keeps working despite surging yields and why "nouveau-leveraged" Mag7s are on the cusp of upside breakout. On the other hand, if the Fed does not hike - as Trump made painfully clear he will not approve - or even merely keeps rates on hold, then all bets are off, as is the Fed's credibility because for all his rhetoric, Warsh will prove to be "just one more of the guys."

Of course, it's not just the Fed: with Trump approval ratings the lowest on record...

... as a plurality of Americans say the most important problem facing the country is "the economy, unemployment and jobs" (followed in distant second place by those who said "threats to democratic values and norms"), Hartnett says that the White House is realizing that $4/gallon gas, 160 dollar-yen, 5% Treasury bond yields are "Maginot Lines" for the US admin, hence policy interventions via FX, bond buybacks, monetary policy (pressure on BoJ to raise policy rate that’s averaged 0.1% this century)...

... and why the policy panic working for now (see the surging Japan yen); or, as Hartnett described a month ago, global markets are subject to “whatever it takes” policies to maintain nominal macro boom and asset price bull...  and why Hartnett says to stay long commodities and debasement hedges, e.g. gold.

To be sure, this observation doesn't exist in a vacuum, and sits neatly inside a coherent set of themes Hartnett has been pushing over  the past several weeks: 

  • "Bonds boss the bubble." His view is that long-dated yields - not equity stories - now dictate the AI trade, captured in his line from a week ago that "bonds trade information, equities trade ideas." He argues AI spenders and builders will keep underperforming AI adopters until global 30-year yields fall below 5%, and that the market is currently priced for a "perfect consensus": no landing, no Fed hike, no AI capex cut, and no Democratic sweep (which will inevitably disappoint).
  • Stay long commodities and gold. With "whatever-it-takes" fiscal intervention holding down long-end yields, Hartnett has kept commodities and gold as the core inflation/geopolitical hedge. 
  • The midterms are the contrarian flip. His base stance is long equities / short bonds, but he carves out a tactical exception: if Democrats look poised to sweep both chambers, a 10%+ equity selloff becomes likely, making bonds the contrarian Q4 buy. Investors have largely shrugged off election risk so far, which is exactly why he sees the asymmetry.
  • The AI bubble is "fit to burst." In related commentary he laid out a post-bubble playbook — "long humiliation, short hubris" — favoring long bonds plus defensives (consumer staples, mining/materials, healthcare) over the crowded AI-buildout names, noting hyperscaler free cash flow has turned negative under buildout commitments.

As Hartnett continues to hammer the rising bond yield theme, he next takes a somewhat contrarian view, and notes that the 10-year rolling return from US stocks is 15%, commodities 11%... while Treasuries are -2%, the worst of the past 100 years.

For bond bulls (if any are still left, now that even career bond bull Lacy Hunt turned bearish) this is a good sign: as the next two charts show, negative long-run returns have been a great entry points for stocks in 1939, 1974, 2009...

... and commodities in 1933, 2018.

And while the US midterms are not a “regime change” election like Thatcher/Reagan in 1980, or BREXIT/Trump 2016, a Fed hike, TSY buybacks, signal a rising risk the midterms show the biggest voter priority is “affordability” not lower taxes, faster AI data center expansion... which is why to Hartnett lower Q4 yields remain a very good contrarian play.

Hartnett's latest Flow Show then pivots away from bond yields, and to the main topic of the week, namely the upcoming midterms (appropriately just as we penned "Democrat Sweep? Here Are JPMorgan's Midterm Trades - And Why Gridlock Pays"). The BofA strategist believes that for all the posturing, the midterms are not a “regime change” election, e.g. Thatcher/Reagan in 1980 = end of inflation/start of bond bull, BREXIT/Trump in 2016 = end of globalization = start of commodity bull;

Alas the coming midterms are unlikely to change the trajectory of US government spending (which will keep rising until it is forced to stop); Hartnett views that 2020s as a decade of political populism as MAGA (Reform party in UK) and Democratic Socialists of America (Greens in UK) represent the culmination of post-GFC Tea Party and Occupy Wall St insurgents. 

More importantly, the populists (right or left) are spending a lot to stay popular... which is why 2020s is a decade of fiscal excess, nominal GDP boom (past six years up 63% in US from $20tn to $32tn) and “Anything But Bonds” strategic asset allocations (TSYs up 74% in past six years, from $23TN to $40TN). Meanwhile, as the latest BofA Fund Managers Survey shows, investors are not fearful of midterms saying POTUS governs through Executive Orders not Congress (277 thus far, on track for most since Truman), and say a Democrat sweep is unlikely given tough Senate “map”; when asked about the most likely outcome from midterms in August BofA Fund Manager Survey (see report), 47% said GOP Senate & DEM House, 23% said DEM sweep, 9% said GOP sweep/maintains control of Congress (current GOP Senate majority is 53-47, in House 218-212).

Source: BofA FMS

To be sure, the Senate map is tough for Dems: they must flip 4 of 6 most vulnerable GOP seats in North Carolina (current probability of DEM flip = 92%), Maine (69%), Alaska (64%), Ohio (55%), Texas (51%), Iowa (37%); and DEMs must defend vulnerable seats in Georgia (94% = current prob of DEM hold), New Hampshire (84%), Michigan (65%); the key battleground states for investors to watch are Ohio, Texas, Iowa, Michigan.

Note that Wall Street is already focused on Texas Governor race between GOP incumbent Abbott (currently polling 49% according to Real Clear Politics) and his Democrat challenger Hinojosa (45%); the clash is seen as big referendum on AI data center expansion (Abbott was recently forced to announce a data center moratorium to arrest decline in polling numbers).

But as Hartnett's next chart shows, the Democratic sweep likelihood is rising, with Trump's Presidential approval number ranges from 35-40%, significantly below historical average 2 months ahead of midterms (53% as shown below).

Furthermore, the BofA strategist points to the latest Polymarket probabilities, which show odds of a Democratic sweep at 50% (vs., GOP Senate/DEM House at 35%, and a GOP sweep at just 10%).

This matters because for Hartnett, a Democrat sweep is a threat to asset prices: an electoral shift from populist capitalism to populist socialism, means the next big direction in tax & regulation is up not down (and EPS negative), and would be accompanied by policies to lower inflation, healthcare, improve affordability challenge K-shape wealth boom, AI capex boom, stocks "too big to fail" Wall Street zeitgeist.

Additionally, loss of political capital = less ability for Trump to coerce resources, corporations, foreign governments into support for policy priorities of AI war with China, resource monopolization.

Putting all this together, Hartnett says a Democrat sweep = big risk-off: it would lead to a slump in i) stocks (more than 10%), ii) the dollar, and iii) bond yields into year-end, while international stocks outperform on less trade & military wars... but Europe outperforms Asia (loses Trump AI friend); the BofA strategist says the best hedge for a Democrat sweep is short financials & US dollar. In contrast, a surprise GOP sweep (maintain House/Senate) control = big risk-on, and more importantly a green light for AI bubble and positive US dollar (“exceptionalism returns").

Finally, the largely priced-in scenario of a “GOP Senate/ DEM House” translates into more of the same: modest risk-on... “gridlock = goldilocks”.

More in the full BofA Flow Show note available to pro subs.

Tyler Durden Mon, 09/07/2026 - 08:30
Tyler Durden

New York Rediscovers Nuclear Power, With Plenty Of Political Fine Print

Zero Rss
1 month ago
New York Rediscovers Nuclear Power, With Plenty Of Political Fine Print

Five years after Indian Point’s last reactor shut down, Albany rediscovered the appeal of electricity that runs around the clock without burning fossil fuels.

Governor Kathy Hochul wants 5 gigawatts of new nuclear capacity, with at least 1 GW developed by the publicly owned New York Power Authority, plus a separate 4 GW initiative. 

There haven't been any announcements for the technology of choice, but the most likely candidates are the large Westinghouse AP1000 and the smaller 300 MW BWRX-300 from GE Vernova Hitachi.

As Canary Media reports, the reversal follows this spring’s weakening of New York’s climate law. The state’s difficulties with delivering large renewable projects also hasn’t helped keep them on the pure-play renewables path, which was made worse with the Trump administration’s assault on offshore wind.

The construction of new nuclear power generation offers a governor facing re-election a unique win-win opportunity: nuclear offers dependable low-carbon generation alongside renewables while also offering industrial investment, construction jobs and promises of lower bills.

Eight upstate communities have expressed interest in hosting projects. With strongly Republican-leaning counties on the list of possibilities, including Jefferson, Oswego, and Schuyler, Gov. Hochul could use the new mega-projects to score political points.

NYISO’s 2026 Power Trends warns in their recent report that trying to replace over 4 GW of something that's almost always on (nuclear) with less than 3 GW of something that's almost always off (renewables) isn't exactly how you set the state up for future success.

The report from NYISO does highlight a common problem between nuclear and other sources of generation, which is the issue of actually getting the power where it needs to go. If most of the energy demand is downstate, then additional dependencies and bottlenecks come into play. Transmission capacity becomes a problem to get the power from upstate.

Then there is Indian Point. As we previously reported, Energy Secretary Chris Wright has pushed to revive the roughly 2 GW facility, whose retirement increased reliance on fossil generation. Hochul opposes reopening it while championing new construction upstate.

A restart would require substantial work, however, a precedent is already being set with other restarts around the country, most notably at the Palisades. If there is true concern in the state for meeting baseload needs, then outright rejecting the restart of a nuclear facility becomes confusing.

Opponents are arguing nuclear spending could crowd out faster alternatives, so Senator Kevin Parker’s pending legislation would impose a 30-month pause on taxpayer and ratepayer support for new or restarted nuclear facilities while a task force studies costs and alternatives.

As we have highlighted a few times now, selective nuclear enthusiasm extends well beyond Albany.

Texas committed $350 million to advanced nuclear development in 2025. Yet Greg Abbott fought the proposed Andrews County spent-fuel storage facility, and Texas enacted restrictions in 2021 on offsite high-level waste storage.

New Mexico similarly committed almost $5 million in development assistance and workforce support for Kairos Power’s Albuquerque expansion. Meanwhile, state officials battled Holtec’s proposed HI-STORE spent-fuel facility. Holtec abandoned the New Mexico project in 2025.

The common thread is an appetite for nuclear generation capacity accompanied by arguments over who carries the liabilities. New York’s pivot could strengthen its grid for decades, potentially even the next century, if it can follow through with its swing.

Tyler Durden Mon, 09/07/2026 - 08:30
Tyler Durden

The 10-Year Treasury Yield Over 5%? Some Thoughts

Zero Rss
1 month ago
The 10-Year Treasury Yield Over 5%? Some Thoughts

Authored by Wolf Richter via WolfStreet.com,

The 10-year Treasury yield has been zigzagging higher since mid-November when the Fed cut its policy rates again despite accelerating inflation. Since that rate cut, followed up by another rate cut in December, the 10-year yield has risen by 80 basis points, heading, apparently inexorably, for the 5%-line.

On Friday, it closed at 4.78%, within spitting distance of 5%, despite Bessent's three hocus-pocus shows to try to bring it down. Sure, they might have helped keeping a lid on long-term yields, as Bessent pointed out; who knows where the 10-year yield would be by now without the hocus-pocus shows. Maybe already over 5%?

The 10-year yield is now 115 basis points above the Effective Federal Funds Rate (EFFR, blue line), which the Fed targets with its policy rates. Note the November rate cut - the drop in the blue line - despite accelerating inflation. That's when the zigzag higher began.

Buyers and sellers in the bond market have good reasons for pushing up the 10-year yield: Inflation refuses to go back into the bottle. The Fed refuses to force inflation back into the bottle, triggering loose financial conditions in most areas of the economy, except in real estate. And the government refuses to even entertain a modicum of spending cuts and tax hikes to contain the deficits. It's been the opposite: tax cuts and spending hikes, and they're still talking in those terms.

The government's unwillingness to contain the deficit causes a flood of supply of new debt needed to fund the deficits. The bond market has to absorb that new debt by luring in new buyers with higher yields - investors that are now sitting on the sidelines watching this play out. If yields move high enough, these investors will begin to nibble, and if yields move higher still, these investors will nibble some more, and if yields move a lot higher still, investors might take big bites. Some of those investors have been nibbling, but the supply keeps coming, and so the 10-year yield keeps rising.

Those reasons for pushing the 10-year yield higher aren't going away anytime soon as neither the Fed nor the government is willing to do what it takes.

The 10-year yield had already breached the 5%-line for a few moments intraday on October 23, 2023, but that was too fast too soon, after a massive surge of 170 basis points in six months. And at 5%, the nibblers started taking out huge bites, and the sellers stopped selling, with the spectacular effect that the yield plunged by 19 basis points intraday, from 5.02% to 4.83%.

That day is circled in the chart above, showing only the closing yields. The yield then continued to plunge for the next two months, and that's how that run for 5% ended.

Here is the hourly spectacle on October 23, 2023:

A 10-year Treasury yield above 5% and well-above 5%, was essentially the norm in the decades before 2008, before QE. Between the mid-1960s and the Dotcom Bust recession, the 10-year yield was nearly always higher than 5%, going as high as 15%. So 5% isn't anything unusual or unheard of. For several decades, it used to be considered low.

The exception occurred during the Dotcom Bust that was hitting the economy, to which the Fed responded by cutting its policy rates as low as 1%, and kept them there too long, causing Housing Bubble 1 to bloom, which ended in the Housing Bust, which triggered the mortgage crisis, which triggered the Financial Crisis. During that time, starting in June 2002 through April 2006, the 10-year yield dropped below 5%, and stayed mostly below 5%, and for part of the time even below 4%. Then it went back over 5% again, when the Housing Bust and the Fed's reaction to the budding Financial Crisis pushed the yield back below 5%. But it didn't drop below 4% until the Fed started QE in 2008.

The 30-year Treasury yield hasn't been so constrained by an imaginary line that formed some kind of ceiling, where the masses come out and buy. It has zigzagged past its October 23, 2023 high, to a two-decade high. On Friday, it closed at 5.24%.

The 10-year Treasury yield looks like it wants to break out - it looks like it already made the first step to breaking out, by leaving behind its two-month range from 4.62% to 4.72%. At some point, sooner or later, given the history of the 10-year yield, the buyers and sellers in the bond market will make another run at 5%.

The big question that arises is this: Will the same thing that happened on October 23, 2023, happen all over again, when huge demand suddenly comes off the fence at that long-awaited 5%, while sellers, shocked and appalled, pull back, thereby causing the yield to plunge again?

Or will the 10-year yield blow through the 5% - with fretting sellers burning through the worried and careful buyers - and head higher, and remain above 5%?

The government's fiscal policies are asking for it. The Fed's policies of being soft on inflation are asking for it. The $40 trillion in Treasury debt outstanding is asking for it.

A 10-year yield of 5%+ is obviously not the end of the world. The US economy has done fine with a 5%+ yield, including during the Dotcom Bubble, which generated a very tight labor market, big pay increases, and lots of economic growth despite a 10-year yield mostly in the range between 5-8%.

And the ratio of interest payments to tax receipts that are available to pay for them was much higher from the mid-1980s through the mid-1990s (see my analysis: Quarterly Update on the Ugly Fiscal Condition of the US in Q2 2026).

Tyler Durden Mon, 09/07/2026 - 08:10
Tyler Durden

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