World at a Glance: Summer Jitters

Research evidence excerpt

World at a Glance: Summer Jitters

US rates: NACHO rates

Marck Cabana, CFA

BofAS

Themes: hike risk underpriced

US rates have moved higher and the curve has bear flattened as resilient growth and

sticky inflation keep the market focused on upside inflation risks. Higher commodity

prices add to that concern, while recent data has pointed to only limited signs of a

meaningful slowdown in growth or employment.

Fed pricing continues to assign very limited probability to near-term hikes despite solid

US labor market data. Many investors still see a high bar for additional tightening, citing

expectations of dovish Fed leadership, a belief that policy is already restrictive, and

confidence that growth will slow enough to keep hikes off the table. But we think hike

risk should be higher than what is currently priced.

Forecasts: cuts pushed to 2H 2027

After our US economics team shifted two cuts from 2026 to late 2027, we revised our

forecasts higher for 2Y and 5Y yields through 1H27, while leaving end-2027 forecasts

and the terminal rate unchanged. Our forecasts remain below forwards, especially

further out the curve. That profile reflects flattening pressure from tighter financial

conditions under a more hawkish Fed.

Risks: skewed higher

We assess the risks to our new forecasts as skewed higher. We see greater likelihood of

rates moving above our forecasts if inflation remains firm, labor market data stay

resilient, and markets begin to price a higher probability of Fed hikes or of a prolonged

hold. Tighter financial conditions + flatter curves would likely accompany that repricing.

Exhibit 1: UST 2y & 10y forecasts vs forwards (%) Exhibit 2: Government bond yield forecasts (%)

Our rates forecasts are still below forwards Our forecast for year-end '26 of 10yT is 4.25%