BofA: Fed Must Hike in September or Treasuries Will Keep Falling
Alina Collins
BofA rates strategist Mark Cabana warns that long-end Treasuries will resume selling off unless the Fed explains how it plans to reach 2% inflation — last week's rout was a textbook inflation-credibility shock.
Why did long-end Treasuries suddenly sell off last week?
BofA called last week's 30-year Treasury sell-off a "textbook inflation-credibility shock."
The trigger: Fed Chair Kevin Warsh told investors he is "firmly committed to 2% inflation" but never explained how he would get there.
This means → the market wanted a roadmap, not a pledge; without one, the pledge itself deepened distrust.
Cabana's words: "The bond market can't be fooled — it will see through everything."
How bad are the numbers?
The 30-year term premium — the extra yield investors demand for holding long bonds over short ones — rose to 1.51%, the highest since December 2013 (per Bloomberg's model).
In plain terms = investors now see more risk in lending to the U.S. government for 30 years, so they're charging a bigger premium.
The 30-year yield hit 5.28% on Friday, then eased 5 bp to 5.22% on Monday; the 10-year dropped to 4.68%, its best weekly open in over two months.
Why does BofA say the Fed must hike in September?
BofA economists wrote Monday that "the Fed reclaiming the narrative through a September hike is now urgent."
This means → BofA believes talk alone no longer works; only an actual rate move can prove the central bank is serious about inflation.
Cabana added: Warsh has signaled an end to forward guidance, but six FOMC members speaking this week need to fill the silence Warsh left behind.
"We're looking for a plan, and we don't see one — that's what the long end of the curve is telling you."
Why did Treasuries bounce on Monday?
Two forces pushed Treasuries higher at the open: Brent crude fell more than 7% in a single day + Treasury Secretary Bessent publicly addressed a key market fear.
The oil drop was triggered by Trump's weekend announcement canceling a "major strike" plan against Iran, while Iran signaled progress in talks on Strait of Hormuz navigation.
ING rates strategist Michiel Tukker: "Oil remains the biggest wildcard — it could determine whether yields end the week higher or lower."
What is the FIMA facility Bessent endorsed?
Bessent publicly backed the FIMA repo facility on Sunday — a mechanism created during the 2020 pandemic that lets foreign central banks pledge their Treasuries as collateral to borrow dollars from the Fed, without selling bonds on the open market.
In plain terms = when Japan's central bank intervenes to support the yen, it can "pawn" its Treasuries for dollars instead of dumping them into the market.
This reflects Washington's effort to break the transmission chain markets fear most: yen intervention → Treasury selling → another long-end yield spike.
Will Japan sell Treasuries — and why is the market split?
Mohamed El-Erian (Allianz adviser): concern over Treasury yields may be one reason the U.S. broke its decade-long policy of not intervening in currency markets.
James Thorne (Wellington-Altus): this episode is "the embryo of a new deal" between Washington and Tokyo — and warns that "when the largest foreign holder of Treasuries becomes a seller, the long end reprices."
Brad Setser (Council on Foreign Relations): foreign demand for long-dated Treasuries "has been soft for a while" — this is not a structural shift.
This means → short-term pressure has eased, but whether the Fed can rebuild inflation-path credibility before September is the real variable driving the long end.
Content is for reference only, not financial advice.