U.S. Treasury benchmark 10-year yields are expected to be at 4.25% by the end of next year, said Mark Cabana, head of U.S. rates strategy at BofA, in a media briefing.
The curve comparing two- and ten-year Treasury yields - widely considered to be a recessionary signal when inverted - is expected to turn positive next year and end the year at +25 basis points, he said.
Despite the expected bond rally, demand concerns will likely continue to impact long-dated securities as the Treasury is expected to ramp up debt issuance.
"We have a lot of concerns about the supply demand backdrop ... There's a lot of duration risk that the market needs to absorb," said Cabana.
Long-dated Treasury yields, which rise when prices fall, surged earlier this year as investors feared interest rates would remain high for long. Many have also attributed the move to rising concerns over increased government bond supply.
Yields, however, have retrenched this month on expectations that the Federal Reserve has reached a peak in its interest-rate hiking cycle, and as the Treasury announced a more modest year-end schedule of Treasury debt sales.
Ten-year yields, which went above 5% last month for the first time in 16 years, were at around 4.28% on Wednesday.
Fed funds future traders have in recent days increased bets the Fed could start cutting interest rates as soon as March next year, although the consensus remained for a first cut to be delivered in May, according to CME Group data.
"We are increasingly confident that they will be delivering rate cuts next year," said Cabana, adding that the timing of the first cut remained uncertain.
(Reporting by Davide Barbuscia; Editing by Chizu Nomiyama)
By Davide Barbuscia