Bank of America's Mark Cabana said the global bond selloff reflects investors reassessing the neutral rate of interest, while traders believe Fed Chair Kevin Warsh has given the market more room to test higher yields.

Cabana, co-head of global rates strategy at BofA Securities, said Warsh remarked during an August speech at Jackson Hole that it was "hard to say" overall financial conditions were restrictive, which weakened the Fed guidance that had previously restrained market repricing. He noted that more than half of the rise in the 2026 US 10-year Treasury yield came after that speech.

"From a bigger-picture perspective, we think there is a broad global reassessment of the neutral rate," Cabana said in an interview on Wednesday. "The market had been reluctant to really test what the neutral rate might be because the Fed provided a lot of guidance," he added. "Now the market is asking: 'How far can we go? What's going to stop us?'"

Cabana said another Fed rate hike is "extremely unlikely," even though policymakers face a dilemma: "There are only two options now — either hike rates, or let bond yields surge."

Treasuries came under heavy selling pressure, pushing 5-year, 10-year and 30-year yields all above 5%, with the 2-year yield also climbing.

Cabana said rates could keep rising until macroeconomic data weakens or financial conditions tighten meaningfully.

Cabana said the Fed appears "uncomfortable" that market rates have already moved above levels policymakers consider appropriate. He warned that if the Fed tries to play down the yield increase while also signaling it is "in no hurry" to act, it could further steepen the yield curve.

"They have almost no control over long-end yields, especially if they are unwilling to use the balance sheet. It could hit financial markets like a sledgehammer," he added.

During this selloff, the US 30-year Treasury yield touched its highest level since 2002.