Bank of America: The key risk facing U.S. investment-grade credit next year is the dovish stance of the Federal Reserve

Bank of America strategist Yuri Seliger and others have pointed out that a key risk for US investment-grade credit next year is that the Federal Reserve could cut interest rates much more than currently expected, potentially driving rates down to 2%. A sharp cut in interest rates could push the 10-year Treasury yield down to a range of 3.0% -3.5%, down from 4.25% expected for 2026, strategists wrote in a report released on Friday. The rate cuts will initially stimulate investor demand for highly rated corporate bonds as money managers seek higher yields on long-term corporate bonds. But as yield-sensitive buyers cut demand and companies take advantage of low yields to increase funding, especially on the long end, interest rate spreads could widen and the curve will steepen again.