Bank of America Lifts 10-Year Treasury Yield Forecast to 5.0% on Fiscal, Energy Risks

Bank of America has significantly raised its year-end forecast for the benchmark 10-year U.S. Treasury yield to 5.0%, up from a previous estimate of 4.5%, citing mounting fiscal pressures and other market risks. The revision, detailed in a research note released Thursday, signals expectations for higher government borrowing costs amid persistent economic uncertainty.

Forecast Revisions

The bank's strategists also increased their forecast for the 2-year Treasury yield to 5.0% from 4.5%, a level described as being slightly above current forward rates. A 5% yield on the 10-year note is a key psychological and financial threshold for markets, influencing borrowing costs across the economy, from mortgages to corporate debt.

This outlook for higher yields is accompanied by a more bullish view on energy. Bank of America raised its second-half 2026 forecast for Brent crude to $95 per barrel, a notable increase from its prior $83 projection. The bank expects continued inventory draws to support an average Brent price near $80 per barrel in 2027.

Key Drivers and Market Risks

Bank of America attributed the revised forecasts to a confluence of risks facing markets ahead of the U.S. midterm elections. The primary drivers cited in the note include:

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• Fiscal challenges: Growing concerns over the U.S. government's budget and debt trajectory.
• Energy market volatility: Geopolitical tensions, particularly concerning Iran, are expected to support higher oil prices.
• Trade tensions: Ongoing disputes that could weigh on global economic activity.
• Other uncertainties: The note also pointed to the economic impact of artificial intelligence as a factor.

Currency and Other Outlooks

Despite the adjustments to its rates and energy outlook, Bank of America maintained its core forecasts for the euro, expecting the EUR/USD pair to reach 1.15 by the end of 2026 and 1.20 by the end of 2027.

The bank did adjust its outlook for the Chinese yuan, forecasting the USD/CNY pair to reach 6.6 by year-end. This is anticipated to be driven by the conversion of export proceeds, a fundamentally undervalued yuan, and increasing pressure from G7 nations to address trade imbalances. The firm's forecasts for metals were left unchanged.