US Treasury Secretary Bessent announced last week that he would double the scale of long-duration Treasury buybacks. Bank of America Chief Investment Strategist Michael Hartnett, in his latest Flow Show report, characterized this move as "quasi-QE." Meanwhile, total US government debt has surpassed $40 trillion for the first time, expanding at a pace of $1 trillion per quarter.

Hartnett stated bluntly that all three indicators in Bessent's "3-3-3" economic framework have failed to meet their targets. Policy credibility is now being reflected through the dual weakness of both the bond and currency markets — "rising yields and a weakening currency mean credibility is deteriorating."

He believes this round of "quasi-QE" should temporarily suppress rates but cannot genuinely push US Treasury yields lower. If the 30-year Treasury yield fails to fall below 5%, the dollar faces a significant decline, and the market will experience a systematic selloff of risk assets. Positioning would shift toward shorting risk assets, shorting AI hyperscale computing, private credit, and shorting financial stocks. At the same time, Hartnett maintains a bullish stance on gold and overlooked long-duration assets.

The "3-3-3" Plan: Three Arrows, Three Misses

When Bessent took office in late 2024, he proposed the "3-3-3" economic framework targeting 2028, with three core objectives: real GDP growth averaging 3% annually, the federal fiscal deficit reduced to 3% of GDP, and domestic daily oil production increased by 3 million barrels.

According to data disclosed by Hartnett in the report, all three indicators have currently fallen short:

GDP growth: averaging less than 2% over the past six quarters
Fiscal deficit: currently around 6% of GDP, double the target level
Oil production: only about 300,000 barrels per day added since 2024, achieving just one-tenth of the target

Hartnett points out that policy credibility has historically been measured by the bond and foreign exchange markets. The collective failure of these three goals is the underlying reason for currently elevated Treasury yields and pressure on the dollar.

Three "Maginot Lines": $4 Oil, 160 USD/JPY, 5% Treasury Yields

Hartnett describes the current policy focus as defending three "Maginot Lines": gasoline prices not exceeding $4 per gallon, USD/JPY not exceeding 160, and 10-year and 30-year Treasury yields not exceeding 5%. If these three lines are breached, he believes it would pose a direct threat to economic growth, the AI investment boom, and asset bubbles.

However, the reality is not encouraging. Hartnett notes in the report that US gasoline prices have risen back above $4 per gallon (significantly higher than the pre-war level of $3 per gallon). With the US-Iran "economic war" ongoing and US crude inventories and strategic petroleum reserves both at 40-50 year lows, there is very limited room for oil prices to decline.

On the exchange rate front, Hartnett believes that US-Japan currency intervention would require the Bank of Japan to deliver a substantial rate hike on September 18 to stabilize Japanese long-end rates and reduce the risk of Japan selling US Treasuries.

The most critical defense line is keeping long-dated Treasury yields below 5% — this directly relates to avoiding a US sovereign credit event (first a ratings downgrade by agencies, then a potential failed Treasury auction), and also to keeping AI financing costs at manageable levels.

Why "Quasi-QE": The Dual Pressure of $40 Trillion Debt and AI Financing

Hartnett outlines three layers of logic that have forced the Treasury to act:

First, debt levels have hit a historic milestone. Total US Treasury debt has just surpassed $40 trillion and continues to expand at roughly $1 trillion per quarter.

Second, net Treasury issuance is crowding out corporate financing. Net issuance of US Treasuries is projected to reach $2 trillion in both 2026 and 2027, which will directly squeeze space in the corporate bond market. Meanwhile, AI-related bond issuance has already reached $200-300 billion year-to-date, and the AI arms race has been designated as the US government's top national security and macro priority.

Third, the divergence between data and markets has triggered a crisis of confidence. Hartnett points out that when nonfarm payroll growth is zero and inflation data reads zero, yet the 30-year Treasury yield rises to 20-year highs, it means the market's trust in fiscal sustainability has cracked — "credibility must be rebuilt immediately."

It is against this backdrop that Bessent's series of "put option" style policy interventions have emerged: signing dollar swap agreements with Asian and Gulf nations, intervening in the yen exchange rate, and now doubling long-dated Treasury buybacks with the Fed's tacit approval. Hartnett characterizes these moves as "policy panic to repair the fixed income market."

He also notes that panic-style fiscal intervention would require Fed Chair Warsh to deliver a "perfectly hawkish" stance at the Jackson Hole meeting on August 28 — not too dovish to avoid further dollar weakness, but not too hawkish to suppress markets.

"Success Is Expected, Failure Is Unthinkable"

Hartnett sums up the extremity of the current situation in one sentence: "Success is expected, failure is unthinkable."

His logic: QE was the starting point of the post-Lehman bull market and the foundation of Wall Street's "too big to fail" narrative. The past 20 years of extraordinary monetary stimulus have produced extraordinary gains in asset prices. Therefore, a new round of "quasi-QE" should reasonably be expected to succeed.

But he immediately provides a clear roadmap for the failure scenario:

"If Bessent's 'panic twist operation' fails to push the 30-year yield below 5%, it will mean a sharp dollar decline and a shift in asset allocation — shorting risk assets, shorting leverage (AI hyperscalers, private credit), and shorting cyclical assets (financial stocks) until the midterm elections."

In this context, Hartnett's long positions are concentrated in gold and overlooked long-duration assets, including REITs, biotech ETFs, regional banks, small caps, and Hong Kong property.