• Bank of America (BAC) lifts year-end 10-year and 2-year Treasury yield forecasts to 5.0%, citing fiscal concerns and broader market risks.
  • The bank also raises its 2026 Brent oil forecast to $95 per barrel, warning of potential supply disruptions.
  • The revised outlook reflects a major shift from BofA's previous expectation of Fed cuts and lower yields.

BofA Turns Bearish on Bonds

Bank of America has raised its year-end forecast for the U.S. 10-year Treasury yield to 5.0% from 4.5%, and also lifted its 2-year yield target to 5.0%. The move signals that strategists at the bank see persistent inflation, fiscal financing pressures, and geopolitical risks keeping borrowing costs elevated rather than falling.

The revised call comes amid a sharp macro backdrop shift. On September 16, the Federal Reserve raised its target policy rate by 25 basis points to 3.75%–4.00%, its first increase in three years. Fed policymakers pointed to elevated and broadening inflation pressures, exacerbated by import tariffs, an energy shock linked to the U.S.-Israeli conflict involving Iran, and AI-related capital spending. The Fed now projects PCE inflation at 3.7% for 2026 and does not expect inflation to return to its 2% target until 2029.

BofA's higher yield call is accompanied by a higher oil outlook: it raised its 2026 Brent forecast from $83 to $95 per barrel and warned that more prolonged supply disruption could push oil above $150 per barrel. The firm also sees risks from Iran, fiscal pressures, trade tensions, and AI uncertainty.

Market Already Pricing In Higher Yields

The forecast is already close to market reality. The official 10-year constant-maturity Treasury yield was 4.96% on September 22, after touching 5.01% on September 16. The two-year yield stood at 4.71%, while the 30-year yielded 5.29%, indicating a relatively flat curve that reflects both near-term Fed restraint and a sizable long-run premium for inflation, debt supply, and uncertainty.

This is a significant reversal for BofA. In its late-2025 outlook, the bank expected the 10-year yield to finish 2026 near 4.0%–4.25%, with risks tilted lower and Fed cuts anticipated. The new 5% target reflects a major reassessment of inflation, policy, fiscal, and geopolitical conditions.

The concern is not only a higher Fed policy rate. Long-duration yields also reflect the "term premium": extra compensation investors demand for holding long-term government debt amid inflation uncertainty, heavy Treasury supply, and fiscal-risk concerns. As deficits expand and more debt matures, the government's interest expense rises, potentially creating a feedback loop where more borrowing requires higher yields to attract buyers.

Implications Across Markets

If yields stay near 5%, households face persistently high mortgage, auto-loan, and credit-card costs. Reuters reported that 30-year fixed mortgage rates were approaching 7%, further pressuring affordability and housing turnover. Businesses, especially highly leveraged firms and those in commercial real estate, will face higher borrowing costs, while capital-intensive AI and infrastructure projects may face greater scrutiny over returns.

Equities could struggle as a 5% risk-free benchmark raises the discount rate applied to future profits, generally creating headwinds for expensive growth stocks and long-duration technology valuations. It also makes cash and bonds more competitive with stocks. Banks and insurers face mixed effects: higher short-term rates can support lending margins, but weak credit demand and unrealized losses on older fixed-income portfolios can offset that benefit. Globally, higher U.S. yields may pull capital toward dollar assets, strengthening the dollar and making financing more difficult for emerging-market governments and companies that borrow in dollars.

The political dimension is unusually direct. President Trump has called for rates to fall toward 1%, while the Fed has raised rates to contain inflation. The divergence makes central-bank independence and the trade-off between inflation control and growth a prominent policy debate. Fiscal policy, trade policy, and oil security around Iran and the Strait of Hormuz are all contributing to the elevated risk environment.

BofA's base case sees the 10-year and two-year yields ending the year around 5%. Upside risks include worsening oil supply disruptions, broadening inflation, weak Treasury auction demand, and faster deficit expansion. A lower-yield scenario could materialize if energy prices normalize, inflation slows convincingly, growth weakens, or investor demand for Treasuries strengthens during a risk-off episode.

The most important near-term indicators are Brent oil prices and Middle East shipping conditions, inflation data, labor-market resilience, Treasury auction results, deficit and issuance announcements, Fed communications, and the response of mortgage and corporate-credit markets. The Fed has signaled a further rate increase is likely: 16 of 18 policymakers anticipated at least one additional quarter-point rise by the end of 2026, according to Reuters.

This is market analysis rather than an investment recommendation. A 5% 10-year yield can create attractive income opportunities, but it also means material duration risk: bond prices fall when yields rise, and high yields can signal broader stresses affecting equities, housing, credit, and public finances.

Correction: An earlier version of this article misstated the Fed's target rate range. It is 3.75%–4.00%, not 3.75%–4.25%.