In 2026, the conditions for U.S. Treasuries to outperform will align—excessive short selling and fiscal pressure will reach a turning point.

According to veteran macro traders’ analysis, 2026 is expected to be a turning point where long-term U.S. Treasuries outperform equities. This view is not merely bullish optimism but is based on objective facts indicating that macro structures in financial markets, position allocations, and policy constraints are converging in an unprecedented manner.

While the market still tends to regard bonds as “non-investment grade,” combining mathematical macroeconomic analysis with technical indicators reveals that long-duration assets have extremely high asymmetric upside potential.

The True Risks Signaled by Gold Price Rise — A Prelude to Deflation Shock

Historical data shows that when gold prices surge over 200% in a short period, it does not forecast a sustained inflation but rather signals economic pressures and declining real interest rates.

After past gold price surges, economic adjustments have consistently followed. For example, after the sharp rise in the 1970s, recession and deflation persisted; following the early 1980s spike, a double-dip recession occurred. The rise in the early 2000s served as a leading indicator of the 2001 recession, and after the 2008 surge, severe deflation hit the markets. The approximately 200% increase in gold since 2020 also did not lead to sustained inflation but suggests increasing economic pressures.

Given this trend, the current gold price movements reflect slowing economic growth and rising deflationary pressures, creating an environment where long-term bonds function more as safe assets.

The Distortion Created by the U.S. Fiscal Crisis — A Vicious Cycle of Interest Payment Compound Growth

U.S. interest payment pressures have already reached crisis levels. Annual interest payments of about $1.2 trillion (roughly 4% of GDP) continue to strain fiscal policy, and this is not a theoretical problem but a real cash outflow.

If high interest rates persist, this burden will grow exponentially in a vicious cycle. This is often called “fiscal dominance,” and the mechanism is as follows: interest rate rise → fiscal deficit expansion → increased debt issuance → higher term premiums → skyrocketing interest costs. This vicious cycle cannot be resolved simply by lowering interest rates; direct policy intervention is essential.

The Treasury has chosen to significantly reduce long-term bond issuance and rely more on short-term debt to ease immediate pain. The issuance share of 20-year and 30-year bonds has been compressed to about 1.7% of total, with the remainder allocated to short-term bonds. However, this strategy merely postpones problems; refinancing short-term debt at future higher interest rates will lead to higher market evaluations of term premiums. Ironically, the rising term premium is a key factor behind the current high long-term interest rates and also a driver of sharp declines in rates during economic downturns.

Record Short Selling Accumulation Triggers Reversal Scenario

Short positions in long-term U.S. Treasury ETFs (TLT) are at their most excessive concentration in the market. The number of shares shorted has reached approximately 144 million, with cover days exceeding 4.

Such excessive shorting cannot be resolved by gentle market shifts. When the environment turns, rapid and dramatic short squeezes tend to occur. Notably, traders have entered large short positions after price volatility has already begun, not before. This is a typical cycle-ending behavior pattern and suggests a potential near-term reversal.

Historically, most major rallies in TLT have occurred during phases of excessive short accumulation. The pressure to cover shorts itself becomes a new upward force.

Institutional Investors Indicate a Turning Point — Smart Money Movements

Recent 13F filings reveal notable signs. Large funds are increasing their holdings of TLT call options on a quarterly basis, indicating that sophisticated capital is beginning to revise strategies toward duration assets.

Even George Soros’s fund has disclosed holdings of TLT call options in its latest 13F. During market turning points, such strategic shifts by major funds often serve as leading indicators of broader market liquidity changes.

Geopolitical Risks Triggering Deflation Shock

Recent news cycles are intensifying “risk aversion.” Heightened international tensions over tariffs are more likely to induce deflationary pressures rather than inflation.

Escalating trade frictions can cause shocks to global supply chains, dampening growth while increasing pressure on corporate profit margins. In this environment, investors are expected to shift capital from risk assets to defensive assets, with bond demand rapidly expanding. This scenario exhibits characteristics of a typical deflation shock rather than an inflationary one.

Mathematical Basis for Long-Term Outperformance — The Possibility of Asymmetric Upside

TLT and leveraged ETFs like TMF, with approximately 15.5 years of duration (interest rate sensitivity), can currently expect yields around 4.4–4.7%. Their holdings include significant upside potential during falling interest rate environments.

Scenario analysis suggests the following upside potential: a 100 basis point decline in long-term yields could yield +15–18% in TLT; a 150 basis point decline could produce +25–30%; and a 200 basis point decline (not an extreme level historically) could result in +35–45% or more.

These estimates do not even include interest income, convexity (nonlinear bond price behavior), or accelerated short covering effects. Due to bond convexity, unlike equities, bond prices can maintain profitability even during declines, providing an embedded mechanism for gains.

Meanwhile, current equity valuations assume robust economic growth, stable corporate profit margins, and favorable financing conditions. If any of these assumptions break down, a rapid underperformance of equities and outperformance of bonds could occur.

The Turning Point Has Already Arrived — Position Adjustments and Policy Interventions

Economic data shows inflation pressures have already begun to subside. Core CPI inflation has fallen back to 2021 levels, and consumer confidence is at a decade-low. Cracks are appearing in the labor market, and credit pressures are mounting. Markets are starting to price in these developments, and bond markets are quick to sense these trends.

The Fed can control short-term interest rates, but if threats to economic growth or explosive fiscal costs materialize, it may revert to historic policy tools such as yield curve control or quantitative easing. Past data shows that from 2008 to 2014, 30-year bond yields fell from 4.5% to 2.2%, with TLT rising 70%. In 2020, 30-year yields dropped from 2.4% to 1.2%, and TLT surged 40% within less than 12 months. These are real-world phenomena, not just theoretical.

2026 Will Be the Year Bonds Outperform — Investing in Asymmetric Upside

When most market participants judge long-term bonds as “investment unworthy” and sentiment indicators hit bottom, excessive short positions accumulate, yields are sufficiently high, and economic growth risks are elevated, conditions align for a major asset class reversal. Historically, this combination has led to significant market shifts.

Delving deeper, the macroeconomic environment in 2026 begins to diverge sharply from the logic of the previous market cycle. Through rigorous macroeconomic reasoning and mathematical analysis, it becomes clear why long-term U.S. Treasuries (like TLT) could deliver the highest returns.

In the current environment, long-duration assets offer not only yield income but also capital gains from falling interest rates and acceleration effects from short squeezes—an “asymmetric upside” potential. From a risk-reward perspective, this presents an extremely attractive positioning.

With 2026 already set as the “year of bonds,” this market shift offers a crucial opportunity for investors who anticipate the change early.