Yields on 10-year U.S. Treasurys could reach 2% within the next six to 12 months amid more significant economic slowdown, according to Bank of America Corp. 

The market’s recent focus toward deteriorating growth fundamentals and away from inflation has helped push the 10-year yield to 2.6%, consistent with the bank’s fair value range of 2.35% to 2.65%. Even if the Federal Reserve is able to steer the U.S. economy to a soft landing, the market’s tendency to outweigh the downside may support duration closer to 2%, strategist Bruno Braizinha wrote in a note to clients Monday. 

Treasury yields dipped to session lows on Monday after the ISM Manufacturing gauge for July included a bigger-than-expected drop in the prices paid component to the lowest level in nearly two years. The 10-year yield reached 2.58% before stabilizing around 2.60%, while the spread between two- and 10-year yields inverted further, touching minus 32 basis points, near the most inverted level since 2000. Twenty-year bonds outperformed other maturities, declining as much as 10.6 basis points to 3.108%, after several dealers predicted another round of auction size cuts bigger than the ones made in May.

“To a large extent, the easy part of the rally is over,” Braizinha wrote. “A further rally from here is possible and even likely, but how much further depends on a series of fundamentals and more technical drivers.”

Braizinha said those factors include the level of consensus that the market forms around the shape of the recession, which is currently a shallow slowdown that pushes the Fed back to neutral by the first quarter of 2024. Other drivers include the potential for a “globally synchronized slowdown” that exacerbates demand for U.S. Treasurys. 

After peaking at 3.47% in June, the 10-year has fallen by roughly 87 basis points on the back of recession fears and comments from Fed Chair Jerome Powell last week that were interpreted dovishly even as the central bank lifted its benchmark rate by 75 basis points. The central bank has also signaled more moves to come to curb the hottest inflation in 40 years. 

This article was provided by Bloomberg News.