Bank of America warns US Treasuries may retreat if Fed fails to clarify inflation target

Bank of America’s Mark Cabana just dropped a phrase that should make every fixed-income investor sit up straight: “textbook inflation credibility shock.” The strategist warned on August 3 that US Treasuries will resume their retreat unless the Federal Reserve gets significantly clearer about how it plans to bring inflation back to 2%. Long-dated Treasury yields had already climbed to levels not seen in nearly 20 years the week prior. The numbers behind the warning Here’s the situation. Core PCE inflation, the Fed’s preferred gauge, clocked in at 3.3% in June. That’s well above the 2% target the Fed has been talking about hitting for what feels like an eternity. The federal funds rate has been parked at 3.50-3.75% through July under Chair Kevin Warsh. And BofA now thinks that’s about to change in a big way. The bank has reversed its previous forecast of no rate changes in 2026. It now projects three 25-basis-point hikes coming in September, October, and December. That would push the fed funds rate to a range of 4.25-4.50% by year-end. Geopolitical tensions have also been pushing energy prices higher, adding another layer of inflationary pressure that makes the Fed’s job even harder....