Structural reasons why US Treasuries will outperform in 2026: Excessive short positions and the tipping point of fiscal pressure

According to veteran macro traders’ analysis, 2026 is likely to be a turning point where long-term U.S. Treasuries outperform the stock market. This view is based not on mere market sentiment but on the convergence of financial structures, policy constraints, and market positioning in an unprecedented manner. Gold is signaling a deflationary trend rather than a warning of sustained inflation, U.S. debt service pressures are reaching a critical point, and excessively accumulated short positions could trigger a sharp short squeeze during market reversals. These complex factors create an “asymmetric upside potential” for bond investments.

Why does a sharp rise in gold prices serve as a deflation signal: an examination of historical patterns

While gold price increases are generally associated with inflation, historical data tell a different story. Immediately after gold rises by over 200% in a short period, economic pressures, recessions, and declines in real interest rates tend to persist.

Looking at specific historical patterns, after gold prices surged in the 1970s, recession and deflation continued, and a double-dip recession occurred following the sharp rise in the early 1980s. The rapid increase in gold prices in the early 2000s foreshadowed the 2001 recession, and after the jump in 2008, the entire market faced deflation. Since 2020, gold has risen again by about 200%, but this phase has not ended with persistent inflation; instead, gold has strengthened its role as a safe haven amid a reversal in economic growth.

The clear implication of this historical pattern is that a rapid rise in gold signals market awareness of economic uncertainty and declining real purchasing power, rather than fears of inflation.

U.S. debt service explosion: refinancing risks under $1.2 trillion annual pressure

The fiscal pressures faced by the U.S. government are not just theoretical but are materializing as actual cash outflows. The annual debt service of approximately $1.2 trillion already accounts for about 4% of GDP, and if long-term interest rates remain high, interest costs will grow exponentially due to compounding.

This situation creates a vicious cycle called “fiscal dominance.” Rising interest rates expand the fiscal deficit, which in turn leads to increased debt issuance. As bond issuance increases, the term premium rises, further elevating interest costs. This spiral cannot be resolved solely through higher interest rates and requires policy intervention—an inherent structural problem.

As long as the burden of debt service continues to grow, markets will have to price in persistently high long-term interest rates, exerting downward pressure on long-term U.S. Treasuries (such as TLT).

The resilience of long-term interest rates driven by the Treasury’s short-term debt reliance strategy

To mitigate near-term pain, the Treasury has adopted a strategy of significantly reducing long-term bond issuance. Currently, 20-year and 30-year bonds constitute only about 1.7% of total issuance, with the remainder almost entirely in short-term Treasury bills.

At first glance, this tilt toward short-term debt appears cost-saving. However, in reality, it merely postpones problems. Short-term debt is continuously refinanced and issued again under future interest rate environments. Markets recognize this structural risk and demand higher term premiums.

Ironically, the Treasury’s emphasis on short-term issuance is a direct cause of the high long-term interest rates. Simultaneously, in scenarios where economic growth collapses, these elevated long-term rates could plummet sharply. The surge in refinancing needs for short-term debt, coupled with a potential reversal of long-term rates, would place significant pressure on the U.S. government as a borrower.

Short selling buildup and institutional investor movements: signs of market reversal

The short interest in long-term U.S. Treasury ETF (TLT) is currently at very high levels. The number of shares shorted is about 144 million, requiring more than four days of trading volume to cover.

Typically, crowded trades do not exit gradually but tend to reverse sharply when market conditions change. Moreover, the accumulation of short positions often occurs after price movements have begun, indicating that market participants are entering en masse after the trend has started to turn—a classic cycle-ending behavior.

Meanwhile, recent 13F filings show large funds significantly increasing their holdings of TLT call options on a quarterly basis. Even renowned investor George Soros’s fund reports holdings of TLT call options. This suggests that sophisticated capital is beginning to rebuild duration strategies, signaling a potential shift in market dynamics.

Trade tensions and inflation cooling: the onset of a deflation shock

Recent economic indicators have caused a significant shift in market sentiment. Core inflation has fallen back to 2021 levels, and CPI growth momentum has clearly weakened. Consumer confidence has dropped to its lowest in a decade, credit pressures are mounting, and cracks are emerging in the labor market.

In this environment, the risk of trade conflicts is rising rapidly. If tariffs expand, they will exert downward pressure on growth rather than inflation. Slowing growth and squeezed profit margins will induce capital to flow into safer bonds. This is a classic deflationary shock scenario, characterized by capital outflows from equities and outperformance of bonds.

The Fed’s yield curve control: a historical precedent

The Federal Reserve cannot directly control long-term interest rates. However, when conditions such as threats to economic growth, exploding fiscal costs, and market turmoil align, it has historically employed two policy tools: quantitative easing (QE) and yield curve control.

While the Fed typically refrains from acting prematurely until pressures become evident, once conditions are met, it tends to respond swiftly. Between 2008 and 2014, the 30-year Treasury yield fell from about 4.5% to around 2.2%, resulting in a 70% increase in long-term U.S. Treasury ETFs (TLT). In 2020, within less than 12 months, the 30-year yield plummeted from about 2.4% to roughly 1.2%, and TLT surged over 40%.

This is not just a theoretical possibility but a repeatedly demonstrated policy pattern. If current structural pressures manifest, the likelihood of the Fed implementing long-term rate cuts is extremely high.

Quantitative analysis of TLT investment case: asymmetric return structure

The basic characteristics of the 20+ year U.S. Treasury ETF (TLT) are as follows: effective duration is approximately 15.5 years, with expected dividends of about 4.4–4.7% during the holding period.

Scenario analysis indicates that a 100 basis point (bps) decline in long-term yields would result in a 15–18% price return for TLT. A 150bps decline could yield a 25–30% return, and a 200bps decline (not an extreme level historically) could lead to over 35–45% gains.

These scenarios do not account for additional gains from coupon income, convexity benefits, or accelerated short covering. Therefore, the actual realized yield could be even higher. This creates an “asymmetric upside potential,” with greater upside than downside risk, forming an investment structure with significant upward potential.

Why 2026 could be the year of bond outperformance

It is rare for all market participants to share the same view and for sentiment to bottom out simultaneously. The simultaneous occurrence of three conditions—excessive short positions, sufficiently high yields, and rapidly rising economic risks—is statistically a precursor to market turning points.

As consensus forms that bonds are “uninvestable,” the mathematical logic of macroeconomics and market structure suggest that long-term U.S. Treasuries could deliver the highest returns in 2026. If this scenario materializes, the era of stock market outperformance will temporarily end, shifting into a phase where bonds outperform over multiple years.

2026 marks the dawn of a new market phase, driven by probabilities and prices.