Bank of America Trims US Rate Outlook Amid Softer Data, Rising Fed Policy Risks

Bank of America has sharply revised down its US Treasury yield forecasts, pointing to weaker economic momentum and political developments that could nudge the Federal Reserve toward a more dovish path earlier than expected. In a note to clients on Monday, interest-rate strategists led by Mark Cabana said they now expect the two-year Treasury yield to close 2025 at 3.5%, lower than their previous projection of 3.75%. The 10-year yield forecast has been cut to 4.25% from 4.5%, signaling expectations for a softer interest rate environment ahead.

Weak economic data shifts the Fed narrative

“Recent US data has meaningfully shifted market Fed pricing and our view on US rates,” Cabana wrote. Over the past month, several indicators — from slower job growth to moderating wage gains — have reinforced the notion that the US economy is losing steam.

While Bank of America’s core economics team still believes the Fed will hold its policy rate steady until the second half of 2026, Cabana’s group notes that the latest labor market weakness has tilted the balance of risks toward an earlier pivot.

The appointment of Stephen Miran, a former Treasury official and political ally of former President Donald Trump, to the Fed Board has also raised questions over the central bank’s policy independence. Some analysts see his appointment as a sign the Fed could become more tolerant of higher inflation, boosting the case for earlier rate cuts.

Political risk meets market momentum

Political uncertainty ahead of the 2026 US midterms is adding another layer of complexity. Investors are increasingly factoring in the possibility of a Fed that is more responsive to political pressure, especially if economic growth stalls further.

Market pricing reflects that shift. Interest-rate swaps now imply traders expect more than two Fed rate cuts by December, with an 80% probability of a quarter-point cut as early as next month. September’s bets, according to Bank of America, may be “stretched,” but strategists are wary of fading them due to the risk of a larger, surprise 50-basis-point cut — echoing the Fed’s unexpected move in September 2024, which marked the start of its current easing cycle.

Strategists adjust their playbook

Bank of America’s rates team is advising clients to position for falling yields. Recommendations include betting on five-year overnight index swaps dropping to 2.8% from the current 3.46%, and adding duration on any temporary backup in yields. They also anticipate breakeven rates — a key market gauge of inflation expectations — to widen in the coming months.

What economists are saying

Some market economists believe the changes underscore how quickly sentiment can swing when data softens and politics intervene. “The Fed’s challenge is twofold — balancing a cooling economy against political noise. If the labour market continues to soften into Q4, a rate cut before year-end will move from being a market speculation to a policy inevitability,” said Dr. Elaine Foster, senior economist at Horizon Macro Advisors.

With the Fed caught between slowing growth and mounting political scrutiny, Bank of America’s downgrade is the latest sign that Wall Street is bracing for a faster shift in the US interest rate cycle — and potentially a bumpier road for the Treasury market ahead.