Mark Cabana, Co-Head of Global Rates Research at Bank of America, warns that markets underestimate the potential rise in short-term interest rates. The bank identifies significant repricing risk for bonds and instruments with maturities of two years or less as central banks reduce accommodative policies.
BofA analysts recommend short positions in Secured Overnight Financing Rate (SOFR) futures and Federal Funds futures. The bank also highlights Overnight Index Swap (OIS) contracts linked to FOMC meetings as tactical opportunities, noting that current market pricing appears too dovish.
The bank projects that two-year Treasury yields could exceed 5%. Furthermore, the federal funds rate target might reach 5.5% if inflation persists, whereas current swap pricing accounts for only three additional 25 basis point hikes, aiming for a range of 4.50-4.75%.
Cabana notes that these dynamics affect global yield curves beyond the US. BofA maintains a paid bias on front-end US rates, anticipating profits from rising yields. Key monitoring factors include Treasury supply, funding market pressures, and incoming economic data.
