By the Chief Investment Office, featuring insights from Chief Investment Officer Chris Hyzy and Mark Cabana, co-head of Global Rates Strategy, BofA Global Research
On screen disclaimer:
Please read important information at the end of this program. Recorded on 9/10/2026.
On screen copy:
Chris Hyzy
Chief Investment Officer
Merrill and Bank of America Private Bank
Chris Hyzy
So much is going on right now in the rates markets, the macro developments all around the world, particularly in the United States in terms of fixed income, yields on longer dated bonds, what new tools the Federal Reserve is deploying or not, as well as the U.S. Treasury. So, overall, so much to unpack. With me here today is Mark Cabana, Head of Rates Strategy for BofA Global Research. Mark, thanks for joining me.
Mark Cabana
Thanks for having me.
Chris Hyzy
Well, needless to say, you know, taking a look at all the headlines and the actions in the markets, virtually everybody wants to be an expert on the Federal Reserve. At least it seems that way. There's a lot of discussion as to what is actually going on and the coordination, or not, between the Federal Reserve and the U.S. Treasury. Can you take us through the state of what's going on in the rates market and across the curve, and yields in general?
On screen copy:
Mark Cabana
Co-Head of Global Rates Strategy
BofA Global Research
Mark Cabana
Sure. We've had big moves and a big rethink on what the Fed is going to do. Big moves have really taken place since the end of the second quarter. Over that period of time, the 10-year is up almost 50 basis points and a very large amount of that move… basically 30 basis points of that… has taken place just in the last two weeks.
On screen copy:
Yield on the 10-year Treasury has climbed 46 basis points since the end of Q2 2026.
Source: Bloomberg, as of September 11, 2026
Similarly, the pricing for the Fed has shifted to a much more hawkish direction. The market is now thinking that the Fed will be hiking three times over the next 12 months, and those hikes are getting pulled forward almost as we speak. The market is now pricing in 50 basis points by January, with the third at, to follow at some point later in 2027. This is been catalyzed by big moves that we have recently seen in oil. As you know, Brent is now back over $100, and it has also taken place in the context of ongoing strong U.S. growth data and a lot of questions about how Treasury and the Fed are going to manage this situation with some unprecedented actions from the Treasury Secretary over the last month or so. So, Chris, lots going on. But the bottom line is big repricing, big shift in thinking from the Fed.
Chris Hyzy
We're potentially seeing a steeper curve here. We know the calculus that has been described in terms of how to keep short rates sticky, even if they have to hike, allowing the bond market investors to price in the back end to steepen the curve. What tools are out there in terms of what the Federal Reserve could deploy or not, as well as the U.S. Treasury?
Mark Cabana
Sure. Let me talk about the conventional tools and then some of the unconventional tools. So their most conventional tool is the overnight rate. They move that up or down. They then influence expectations for how the overnight rate will move over time, and that propagates out the curve. Their most direct control is in the front end. And then what happens at the long end, by and large, is beyond their control. Now, the conventional way that the U.S. Treasury has operated is that it says basically, look, Congress sets the deficit. It is what it is. I've got to then fund the government. I want to fund the government in a very steady-handed, regular and predictable way where I limit surprises and I view the market as relatively agnostic.
That is the conventional tool set. Fed has the overnight rate, Treasury finances where they can in the most stable way that they can. Now, the unconventional tools that each have include: the Fed can utilize their balance sheet in a really big way. They can buy long-dated securities. They can do yield curve control. They can buy a range of assets if they want to.
On screen copy:
Unconventional tools of the Fed:
Purchase long-dated securities
Yield curve control
Buy various assets
They're not doing any of those right now, and we don't think that they will employ any of those. Now, the Treasury has also unconventional tools that it can use. It can adjust the mix of its issuance. It can issue more at the front end, less at the long end. And over recent years, it has unveiled a tool called buybacks that are normally designed to promote market functioning and help dealers intermediate markets more efficiently. But in the last month or so, we have seen the Treasury Secretary use these buyback tools to more actively manage the market.
On screen copy:
In August, the U.S. Treasury announced a doubling of the size of long-dated buybacks to increase liquidity.
Mark Cabana
And really, that's where we have seen the biggest change, the biggest non-conventional tool adoption. It is through a more activist approach to debt management and Treasury yield and curve management from the Treasury Secretary. So these unconventional tools are now being deployed by the U.S. Treasury Secretary. We doubt they'll be deployed by the Federal Reserve, but there is more that each side can do if they really want to.
Chris Hyzy
We talked a lot about unconventional and surprises, but take us through what surprises could be out there through the end of the year or even all the way into mid next year? What should we actually be thinking about as to the potential for surprises?
Mark Cabana
There's many areas for surprises out there. Certainly one that I think is most top of mind is what happens with commodities. And I think many in the market have just acknowledged that the Iran conflict is going to last for longer, but oil prices are not going to increase that much. Most have thought that we've seen the highs in commodities, and there's just going to be a lot of noise, especially leading into the midterm, that the president wouldn't want to see commodities any higher.
What that has the potential to be a great surprise. But if oil is not max at 100, but max at 150 or 200? That will influence the economy in many, many important ways. It will influence interest rates and the Fed's thinking on the inflation outlook in many important ways. It'll influence the consumer and how they view their overall well-being. We obviously have an election in early November. We know what the market is thinking. Divided government is the base case for the market right now. But there can be surprises along those lines. And then next year we will have a new Congress. We will have a debt limit that will need to be dealt with. We will see if there is any resolution in geopolitics. And we still have an awful lot that's happening on the trade front. So, Chris, a lot of things that are moving right now.
Chris Hyzy
Let's end on this last question. Task forces. They're out there. There's five of them. One in particular that I'm personally interested in a little bit more is the inflation framework. Any thoughts on potential conclusions coming out of that or any of the other task forces that could lead to potential surprises of what the Fed is actually looking at to adjust policy?
On screen copy:
Federal Reserve's Five Task Forces:
Communications
Balance Sheet Policy
Data
Productivity & Jobs
Inflation Framework
Mark Cabana
So there's a lot that the new Fed chair wants to take a bit of a step back on, have a rethink on and the task forces are presumably working away right now. I expect, and I think most expect, that we will start to learn the conclusions of some of those task forces maybe by the end of this year, more likely early next year.
But let's call it deadline of no later than Q1 of next year, and we'll have to see what they say. Now, on the inflation task force, there's really two key things I think they are looking at. One, Warsh wants to better understand what are the underlying drivers of inflation. Do we really understand them? Do we understand how the Fed can influence them?
And second, what are inflation frameworks that the central bank should be using? We know that the central bank has long had an objective of targeting stable prices, as defined by 2.0% core PCE. But are there other ways to think about that? One item that is frequently discussed is why focus on a very specific point, while you could consider a range, and if you think about a range, what is that range?
Is it one and a half to two and a half? Is it 1 to 2? Is it or 1 to 3? Is it something different? We don't know. But that will be one of the key things that we expect to learn. And then the other task force I would say that I get a lot of questions about is around the Fed's balance sheet.
The Fed's balance sheet is very large, it's around $7 trillion. It has doubled in size multiple times. Post GFC it doubled once and then it doubled again post-Covid. Does it have to be that way? What changes might they consider? So that one we are looking forward to learning from our view, and we have a very strong view on this, is that short answer is they're not going to change much because they can't for very technical reasons that I can get into if you care.
But that is indeed another one that has quite direct application in financial markets. Because if the Fed starts changing how it implements monetary policy, or if it changes the securities that it is holding or the duration of the securities that it is holding, that can indeed spill over directly into financial markets. But we don't think there's going to be much of an impact.
Chris Hyzy
So Mark, I want to thank you very much. We've covered a lot. There's a lot of experts out there. But there's one on this call right now and that's you. So thank you very much. I appreciate it. And we'll talk to you soon.
Mark Cabana
Thanks so much for having me.
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[End of transcript]
The bond market is sending investors powerful, and sometimes conflicting, signals. Longer-term yields have risen sharply as inflation pressures, geopolitical uncertainty and heavy borrowing add to market volatility. At the same time, the U.S. Treasury's expanded buybacks of longer-dated debt have introduced another twist, raising questions about liquidity and the direction of the yield curve.
In the video above, Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, speaks with Mark Cabana, co-head of Global Rates Strategy for BofA Global Research, about what's driving the rise in yields and how the Treasury and Federal Reserve could respond as markets predict a prolonged hiking cycle. "The bottom line is big repricing, big shift in thinking from the Fed," Cabana says.
Cabana also underscores potential surprises that may come across investors' radars, from commodities and elections to geopolitics and trade: "Probably, if history is any guide, there will be something that we're not even thinking about today that will be top of mind for us in the next 6 to 12 months."