US Stocks Face Double Threat of Soaring Debt and Bond Yields
US stocks have been experiencing a remarkable rally in 2026, with little resistance from inflation worries, geopolitical risks, and elevated borrowing costs. The S&P 500 index reached an intraday high above 7,800 before finishing at a record 7,798.99, extending its year-to-date gain of around 14%. Bank of America strategist Michael Hartnett warns that two threats could eventually challenge this advance: the exploding US national debt burden and persistently high Treasury yields.
The national debt is on the verge of crossing $40 trillion, with Hartnett estimating it could reach $50 trillion by 2029. The speed and cost of this accumulation matter for stocks because increasingly large interest payments can consume government resources while forcing the Treasury to issue enormous amounts of debt. In July, the federal government recorded a $432.3 billion deficit, its largest monthly shortfall since March 2021.
The Congressional Budget Office had estimated that the federal deficit reached around $1.4 trillion during the first nine months of fiscal 2026. The concern is less about the debt number itself than what it could eventually do to inflation, interest rates, and investor confidence. Rising Treasury yields have remained stubbornly high even as recent inflation data reduced expectations for another immediate Federal Reserve rate increase.
The Treasury sold $25 billion of 30-year bonds at a 5.216% yield, the highest rate at a 30-year auction since 2001. This is an uncomfortable backdrop for stocks trading near record valuations, particularly for growth and technology stocks whose valuations depend heavily on profits expected years into the future.
Hartnett's broader argument is that investors have few attractive alternatives to US stocks, but this logic has a limit. If Treasury yields rise far enough, the opportunity cost of owning stocks becomes harder to ignore. A rapidly expanding debt load could make investors demand an even larger premium for holding US assets, compressing stock-market valuations.
While Hartnett doesn't predict a sudden fiscal crisis, he warns that the gradual shift in the market's calculation of risk could eventually challenge Wall Street's relentless rally.