Bond Yields Could Jump to Seven-Year High By the End of 2018, BofA Predicts

Bond yields have jumped in recent weeks amid the looming threats of inflation and Federal Reserve interest rate hikes.

The yield on the benchmark 10-year Treasury note closed at 2.961% Thursday, up 22% since the beginning of the year.

According to analysts from BofA Merrill Lynch Global Research, bond yields are on track to clear 3% before the year is out. In a Feb. 23 note, analysts hiked their target for the 10-year note yield to 3.25% by the end of 2018. The last time the 10-year yield was that high was April 2011, according to FactSet data.

BofA said the forecast revision to 3.25% from 2.85% was driven by above-potential growth and a worsening supply/demand dynamic. "However, this transition will likely be a bumpy one due to the interplay between rates and risk assets," analysts said.

"We believe the US Treasury needs to increase net borrowing substantially in fiscal year 2018 and 2019 as a result of worse fiscal deficits and the Fed balance sheet unwind," BofA said. "We expect that Treasury's total borrowing needs will need to nearly double versus last year to be over $1 trillion in each of the next two fiscal years."

Analysts said that from the demand side, existing Treasury buying won't be "sufficient to make up for the increase in supply at the current level of rates." There will likely be lower demand from foreign private and domestic banks in 2018 compared to recent history. Plus, regulatory factors could also worsen demand.

"While this will likely be partially offset by foreign official and pension buying, we think rates will need to rise to attract sufficient demand," BofA noted.

The 10-year Treasury note yielded 2.885% Friday morning.