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Strategists led by Mark Cabana cut their year-end forecast for two-year yields to 3.5%, from 3.75% previously. They see 10-year yields at 4.25% by the end of December compared with the previous estimate of 4.5%.
'Recent US data has meaningfully shifted market Fed pricing and our view on US rates,' Cabana wrote in a note Monday. 'Fed independence erosion risk could see higher inflation tolerance and more low-rate champions, which factor into our thinking.'
While Bank of America's economics team still expects the Fed to remain on hold until the second half of 2026, the rate strategists say soft labor market data has increased downside risks to interest rates. The appointment of Stephen Miran, an ally of President Donald Trump, as a Fed governor 'will likely further tilt the balance in favor of lower rates,' the strategists wrote.
The strategists have recommended bets on five-year overnight index swaps to decline, targeting a move to 2.8% from 3.46% currently. They also favor 'adding duration on any rate back up' and expect breakeven rates –which reflect investors' inflation expectations— to widen.
Interest-rate swaps show traders have priced in more than two rate reductions by December, with an about 80% probability of a quarter-point Fed cut as early as next month.
While the market pricing for September 'is stretched,' the strategists said they are reluctant to fade it because there's a risk that the Fed may lower borrowing costs by 50 basis points, similar to what it did in September 2024 when policymakers started the monetary easing with a jumbo cut.
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