What does fiscal dominance mean: Why will bonds lead stocks in 2026

In a time when everyone is bearish on long-term bonds, seasoned macro trader Common Sense Investor (CSI) has made a bold yet data-supported decision—to allocate 60% of his portfolio to TLT (20+ year U.S. Treasury ETF) and its leveraged product TMF. This is not gambling, but based on a rigorous macroeconomic logic. When fiscal pressures begin to drive the market, bonds are brewing the strongest rebound opportunity in history.

Explosive U.S. interest payments create a vicious cycle of fiscal deficits

What does fiscal dominance mean? Simply put, when government interest payments become the largest variable in economic operations, everything is rewritten.

Currently, the U.S. pays about $1.2 trillion annually in interest, approaching 4% of GDP. This is not abstract economic theory but real cash flowing out of the government treasury. The key point is that this number is accelerating.

This creates an unfixable vicious cycle: high interest rates → larger deficits → greater debt issuance demand → higher term premiums → higher interest payments → continued deficit expansion. This deadlock will not automatically stop due to “long-term high interest rates”; it can only be broken through policy intervention. In other words, the government must act, or fiscal pressure will crush the economy.

The real signal from gold: not inflation, but recession warning

Markets habitually link gold rises to inflation, but historical data tell a different story. Whenever gold surges over 200% in the short term, it has never signaled persistent inflation, but rather the opposite—recession and deflation risks.

Looking back: after gold skyrocketed in the 1970s, recession and deflation followed; in the early 1980s, after a surge, double recessions occurred; the early 2000s rally foreshadowed the 2001 recession; the breakout in 2008 was accompanied by the financial crisis. Since 2020, gold has risen about 200%, and this pattern is very clear—the growth outlook is under pressure, and real interest rates will decline.

When growth begins to reverse, gold’s performance resembles a panic indicator, which is a precursor to bond strength.

The Treasury’s short-termization trap, laying future risks

To ease current interest pressures, the Treasury has made a seemingly smart but extremely dangerous decision—to sharply cut long-term bond issuance. Currently, 20- and 30-year bonds account for only about 1.7% of total issuance, with most of the rest pushed into short-term Treasury bills.

This strategy solves immediate pain but merely kicks the problem into the future. Short-term debt needs rolling and refinancing, and when these bonds are reissued at higher future interest rates, costs will explode. The market has already sensed this risk, demanding higher term premiums—this is the real reason long-term yields stay high, and why, once growth collapses, long bond yields will plummet sharply.

Short positions in bonds are piling up; a historic squeeze opportunity is brewing

Currently, TLT has about 144 million shares shorted, with a covering period exceeding 4 days. This is one of the most crowded short positions in the market and also among the most dangerous.

Crowded trades do not exit slowly—they reverse violently. Especially when the fundamental narrative shifts, this reversal can accelerate rapidly. Notably, these short positions were not pre-positioned but built during the decline—classic late-cycle behavior. Once a reversal triggers, short covering will become a powerful catalyst for TLT’s rise.

The inevitable policy shift

The Fed cannot directly control long-term rates, but when long yields threaten economic growth, trigger explosive fiscal costs, or disrupt asset markets, history shows it will only take two actions: buy long-term bonds (QE) or directly cap yields (YCC—Yield Curve Control).

This is not speculation—these are well-documented historical patterns. Between 2008-2014, the 30-year yield fell from about 4.5% to 2.2%, with TLT rising over 70%; in 2020, yields dropped from 2.4% to 1.2%, and TLT surged over 40% in less than 12 months. Policy shifts won’t come early, but once pressure appears, responses are certain.

Trade frictions catalyze deflationary logic, capital shifts to bonds

Recent geopolitical and trade developments are reinforcing the “safe-haven” rather than “reflation” narrative. Trade tensions and tariff threats will suppress growth, squeeze profit margins, and reduce demand—all features of deflation, not inflation.

As markets shift to risk aversion, capital will flow away from stocks and toward bonds for safety and yield. This transition is underway.

Cooling inflation and emerging economic cracks

Recent data are already telling a new story: core inflation is falling back to 2021 levels, consumer confidence is at a decade low, credit pressures are building, and the labor market is showing signs of stress. The bond market, always the most sensitive forward indicator, has been pricing in these growth risks.

Smart money is already repositioning

13F filings reveal a key signal: large funds are increasing their holdings of TLT call options in quarterly top-buy lists. Even George Soros’s fund explicitly holds TLT call options in its latest 13F. This indicates that veteran institutional capital is rebalancing duration, recognizing the bond opportunity.

From valuation mismatch to investment opportunity

Today’s stock prices reflect assumptions of strong growth, stable profit margins, and moderate financing conditions. Bonds, however, are priced based on fiscal pressures, sticky inflation fears, and permanently high yields. If any of these narratives deviate, returns will diverge sharply.

Long-duration bonds have “convexity”—limited downside, unlimited upside. Stocks do not have this feature. This asymmetric risk profile makes bonds a better risk-reward in uncertain conditions.

TLT’s asymmetric upside potential

Currently, TLT has an effective duration of about 15.5 years, with yields between 4.4% and 4.7%. Based on scenario analysis:

• If long yields fall by 100 basis points, TLT’s price return could reach 15%-18%
• If yields fall by 150 basis points, returns could reach 25%-30%
• If yields fall by 200 basis points (not an extreme in history), TLT could surge over 35%-45%

This does not include interest income, convexity bonuses, or short covering acceleration effects. That’s why CSI sees an “asymmetric upside” opportunity—limited risk but huge potential gains.

Why position in long bonds now

After experiencing significant losses in 2022, it takes courage to be bullish on long bonds. But markets do not change logic based on your psychological trauma—they only price probabilities.

When everyone agrees bonds are “uninvestable,” sentiment is at rock bottom, shorts are piled high, yields are high, and growth risks are rising—that’s precisely the moment to enter. CSI has allocated 60% of his portfolio to TLT and TMF, achieved 75% returns from stocks by 2025, and reallocated most funds into bonds by November 2025.

His current strategy is “hold bonds and wait for the rise”—collecting over 4% interest income while waiting for fiscal pressures to trigger a policy shift. This position is not based on vague market narratives but on the inevitable policy and growth dynamics.

Fiscal dominance means policy intervention is certain; policy intervention means long yields will decline; yield declines mean a bond bull market. 2026 will ultimately be the “Year of Bonds.”