If consumer prices drop to 2% next year, President Donald Trump could be headed for a political and market win, according to Bank of America strategist Michael Hartnett—who says a little-followed bond trade could thrive in the process.
The expert, known for his contrarian views, sees a unique setup where politics, inflation and markets collide.
Hartnett's latest ‘The Flow Show’ report suggests that if inflation falls to the Fed's 2% target, Trump's approval could rise above 45%—a shift that might hand Republicans a clear advantage in the 2026 midterms.
But for investors, the real opportunity lies in long-dated Treasuries.
The Contrarian Bet: Long Zero-Coupon Treasuries
Hartnett recommends that contrarian investors buy the PIMCO 25+ Year Zero Coupon U.S. Treasury ETF (NYSE:ZROZ), a long-duration bond fund that holds zero-coupon Treasuries and tends to rally sharply when long-term interest rates fall.
This "contrarian" play goes against the market's current bias toward inflation hedges.
According to Hartnett, affordability stands at the heart of voter concerns, and he sees the Consumer Price Index as a clear political barometer.
If inflation falls to 2%, Trump's approval rating could rise above 45%. But if it stays closer to 4%, his support could slip below 40%, weakening his position ahead of the 2026 midterms.
One under-the-radar upside of this affordability push could be a reversal in trade policy.
Hartnett said that pressure to lower prices may force Washington to unwind tariffs—ending the long-standing U.S.-China trade war. That move would help cut consumer prices further, adding fuel to the bond rally.
Government Intervention May Follow: Short Inflation Sectors
Lower inflation, however, may come with a cost.
Hartnett warns that if the administration wants to push inflation toward 2% while keeping the economy hot, it may rely on direct government intervention to curb prices.
He describes a shift from the "invisible hand" of market forces to a "visible fist," in which the federal government steps in to control prices or increase supply in sensitive sectors to boost consumer spending.
That could mean tighter margins or even losses for companies, as policies aimed at affordability cap their pricing power.
Hartnett expects “negative profit margins” in these sectors if aggressive anti-inflation measures take hold.
In his contrarian-inflation scenario, investors should also bet against the so-called "whip inflation" sectors—industries like energy, housing, insurance, and utilities—that typically perform well in high inflation but may suffer if prices cool and margins get squeezed.
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