Bank of America Warns Treasury Selloff Could Resume if Fed Fails to Clarify Inflation Strategy

The U.S. Treasury market could come under renewed pressure if the Federal Reserve does not provide a clearer roadmap for achieving its 2% inflation target, according to Bank of America strategist Mark Cabana.

In a research note released on Tuesday, Bank of America said it expects the Federal Reserve to leave interest rates unchanged at its July policy meeting. However, the bank cautioned that while a rate hike remains unlikely, it cannot be completely ruled out.

Cabana explained that the bank’s base-case scenario is for the Fed to maintain current interest rates, with two policymakers—Lorie Logan and Beth Hammack—expected to dissent in favor of a rate increase. Even so, he noted that an unexpected hike would represent a significant departure from decades of Federal Reserve practice.

According to Bank of America, financial markets have already priced in about 10 basis points of potential tightening, reflecting investor uncertainty and the possibility of a more hawkish stance from the central bank. However, the firm stressed that history suggests the Fed rarely catches markets off guard with surprise rate hikes.

The bank pointed out that since 1994, the Federal Reserve has never raised interest rates when market expectations for such a move were below 60%. As a result, any rate increase at the July meeting would be unprecedented and could significantly reshape market expectations for monetary policy in 2026.

Bank of America also noted that its decision to forecast a rate hold became more balanced after softer-than-expected U.S. inflation data for June. However, rising oil prices continue to pose an inflation risk, increasing the possibility that price pressures could re-emerge.

Although recent de-escalation in tensions between the United States and Iran has helped ease concerns over further spikes in oil prices, the bank warned that energy markets remain a key source of inflationary risk that policymakers cannot ignore.

Cabana added that if the Federal Reserve fails to clearly communicate how it intends to return inflation to its 2% target, investors could resume selling U.S. Treasuries, pushing bond yields higher and increasing market volatility.

Despite these risks, Bank of America said it continues to favor positions tied to shorter-term U.S. Treasury securities, maintains its outlook for a flatter Treasury yield curve, and remains bullish on the U.S. dollar.

Investors will now be closely watching the Federal Reserve’s policy statement and Chair Jerome Powell’s comments for clearer guidance on the central bank’s inflation strategy and the likely path of interest rates in the months ahead.