Bank of America cuts US rates outlook as weak data, Fed risks mount
&imwidth=600&imheight=450&format=webp&quality=medium "Bank of America cuts US rates outlook as weak data, Fed risks mount")
A woman takes a photo of the US Treasury building in Washington Photograph: (Reuters)
Bank of America has revised its US Treasury yield forecasts downwards due to weaker economic data and rising political risks.
Bank of America has lowered its US Treasury yield forecasts, citing weaker economic data and rising political risks that could push the Federal Reserve toward a more dovish policy stance. As per Bloomberg, interest-rate strategists led by Mark Cabana now expect two-year Treasury yields to end 2025 at 3.5 per cent, down from their earlier projection of 3.75 per cent. They see 10-year yields finishing the year at 4.25 per cent, compared with a previous forecast of 4.5 per cent.
Weaker data shifts market outlook
“Recent US data has meaningfully shifted market Fed pricing and our view on US rates,” Cabana wrote in a client note on Monday. He added that the risk of “Fed independence erosion," potentially leading to higher inflation tolerance and more policymakers advocating for lower rates is factored into the bank’s revised view.
While Bank of America’s economics team still expects the Fed to hold rates steady until the second half of 2026, Cabana’s rates team highlighted that softer US labour market data has increased downside risks.
The appointment of Stephen Miran, an ally of President Donald Trump, as a Fed governor is seen as another factor that could tilt the balance in favour of lower interest rates, Bloomberg reported.
Market bets on rate cuts grow
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According to Bloomberg, the strategists are recommending bets on five-year overnight index swaps falling to 2.8 per cent from 3.46 per cent currently. They also advise “adding duration on any rate back up” and anticipate that breakeven rates, a measure of inflation expectations, will widen.
Interest-rate swaps show traders have priced in more than two Fed rate cuts by December, with an 80 per cent probability of a quarter-point reduction as early as next month. While Bank of America sees September market pricing as “stretched,” the strategists said they are reluctant to bet against it due to the risk of a larger 50-basis-point cut,similar to the Fed’s surprise move in September 2024 when it began its easing cycle with a jumbo cut.
Bank of America’s revised US Treasury yield forecasts
The table below shows Bank of America’s old versus new year-end 2025 forecasts for US Treasury yields. The revision reflects expectations that the Fed could pivot to lower rates sooner, given softer economic data and political developments.
| Maturity | Previous Forecast (Dec 2025) | New Forecast (Dec 2025) |
| 2-year | 3.75% | 3.50% |
| 10-year | 4.50% | 4.25% |
(Source: Bank of America projections, as per Bloomberg)
(With inputs from the agencies)