Mark Cabana at Bank of America just called the recent Treasury selloff a "textbook inflation credibility shock," and that should worry anyone holding long-dated bonds. The strategist warned on August 3 that US Treasuries will keep sliding unless the Federal Reserve gets serious about explaining how it plans to wrestle inflation back to 2%. Long-dated Treasury yields had already climbed to levels not seen in nearly two decades.
The core PCE inflation gauge, which the Fed actually cares about, sits at 3.3% as of June. That's 65% above the Fed's stated 2% target. Meanwhile the federal funds rate has been stuck at 3.50-3.75% through July under Chair Kevin Warsh, but Bank of America just flipped its entire 2026 forecast. Instead of no rate changes, the bank now expects three 25-basis-point hikes in September, October, and December. That would push borrowing costs to 4.25-4.50% by year-end, adding 75 basis points across the entire economy.
Why the Fed's silence matters
The real problem isn't the inflation itself. It's that the Fed keeps saying one thing while the data shows another. Cabana's argument is straightforward: either explain how you're closing that gap or admit it takes longer than markets think. Vague reassurances just accelerate the selloff. Geopolitical tensions have been pushing energy prices higher too, piling more pressure on the Fed's already difficult position.
Investors should watch three things closely over the next few weeks: any shift in Fed language around the 2% target when officials speak next, the July core PCE reading when it drops, and whether long-dated Treasury yields continue testing those two-decade highs.
This material is informational only and should not be construed as financial advice. Market forecasts carry inherent risks and may not materialize as expected.
