"You Can't Fool the Bond Market!" BofA Warns Fed: U.S. Treasuries May Keep Falling Without New Inflation Plan

Mark Cabana, Head of U.S. Rates Strategy at Bank of America Global Research (BofA) (BAC-US), warned that if the Federal Reserve (Fed) does not provide clearer guidance on how to return inflation to its 2% target, U.S. Treasuries may resume their decline after a short-lived rebound, with long-term yields potentially climbing again.

Cabana pointed out that long-term U.S. Treasuries were heavily sold off last week, pushing yields to near 20-year highs—a classic "inflation credibility shock." Although Fed Chair Powell reaffirmed his commitment to lowering inflation during a press conference, he failed to outline specific methods for investors, leading bond markets to question the Fed’s ability to control prices effectively.

In an interview with Bloomberg Television, he stated that while the Fed’s determination to bring inflation down to 2% is commendable, without explaining the policy pathway to achieve this goal, the market will not believe it. "You can’t fool the bond market—it will ultimately see through everything."

Bloomberg Economics models show that the term premium on U.S. 30-year bonds rose to 1.51% last week, the highest since December 2013. The term premium represents the additional compensation investors demand for holding long-term bonds versus short-term ones; its rise reflects deepening concerns over inflation and policy uncertainty.

The yield on 30-year U.S. Treasuries briefly reached 5.28% last Friday and dipped 5 basis points to 5.22% in early Monday (3rd) trading. However, Cabana believes this rally in bond markets is unlikely to be sustained unless the Fed presents a clear policy plan.

On Monday, BofA economists released a report stating that following last week’s press conference and the bond market’s sharp reaction, the Fed must pass the "September test"—regaining control of the policy narrative through rate hikes and restoring market confidence in its anti-inflation capabilities.

Powell has indicated the Fed will end its practice of forward guidance, no longer signaling potential interest rate moves in advance. Cabana argues that what the market truly fears is not the disappearance of forward guidance, but the absence of a replacement policy framework. The six scheduled Fed officials set to speak this week must attempt to fill the information vacuum left by Powell’s silence.

"Investors are looking for an anti-inflation plan, but so far, there’s no concrete solution in sight. The sharp rise in long-end yields is the bond market’s vote of no confidence in the Fed," Cabana said.