Bank of America Corp. strategists are warning investors about the risk of Federal Reserve interest rates rising above 5% in 2022, according to reports from NDTV. The interest-rate market is still underestimating the endpoint of a Fed hiking cycle that started this week, with a team including Mark Cabana and Meghan Swiber urging clients to position for higher two-year Treasury yields. Swaps imply three more quarter-point hikes, which would take the effective federal funds rate into a 4.5% to 4.75% range, whereas BofA sees the potential for overnight borrowing costs to revisit the highs from the 2022 to 2023 hiking cycle, when the target rate reached as much as 5.5%. The BofA team's forecast that two-year yields will rise to 5% this year, from around 4.7% on Friday, bucks consensus expectations.
The BofA team's forecast that two-year yields will rise to 5% this year, from around 4.7% on Friday, bucks consensus expectations. As reported by NDTV, the strategists are recommending clients short two-year Treasuries, with a yield target of 5.25% — around the 2023 peak. Their analysis suggests that a Fed that does not view policy as restrictive is likely to keep hiking until financial conditions become restrictive, strengthening their conviction in a flatter yield curve. The strategists, who are responsible for covering the bond market and identifying trade opportunities for clients, are a separate group from BofA's economists, who focus on the central bank. While front-end yields can continue to rise, they expect a more limited pass-through to longer tenors, with the 10-year seen finishing the year at 5%, close to where it was trading on Monday.
According to NDTV reports, comments from Chairman Kevin Warsh that Wednesday's rate hike removed a 'dose of accommodation' suggest officials don't yet view monetary policy as stymieing the US economy. Warsh was careful not to commit to any future move but reaffirmed his dissatisfaction with inflation's trajectory and drove home the central bank's commitment to price stability. The US yield curve has flattened in recent sessions, with shorter-maturity yields rising faster than those on longer bonds, as traders added to bets for further Fed hikes. BofA's US economist Aditya Bhave said his team is sticking with their call for two more hikes this year in October and December, with no policy action expected in 2027.
As reported by NDTV, BofA's strategists pointed to the Fed's latest Summary of Economic Projections, which showed officials see much greater upside risk to inflation than to unemployment. They also cited a measure of the Taylor rule — a widely used formula that generates a suggested policy rate based on how much inflation and economic output are deviating from target levels — as implying the Fed funds rate should be around 5.3%. The strategists noted that 'Simple frameworks suggest Fed funds should be greater than 5%' and expect a more limited pass-through to longer tenors, with the 10-year seen finishing the year at 5%, close to where it was trading on Monday. Their analysis suggests that a Fed that does not view policy as restrictive is likely to keep hiking until financial conditions become restrictive, strengthening their conviction in a flatter yield curve.
