Bank of America warns that markets may be underestimating how far short-term interest rates could climb. Mark Cabana, Co-Head of Global Rates Research at the bank, recommends short positions in SOFR futures, Federal Funds futures, and specific OIS contracts. BofA projects that two-year Treasury yields could trend above 5% and the federal funds rate target could potentially climb toward 5.5% if inflation pressures persist. The bank maintains a bearish bias on US front-end rates, closely monitoring three catalysts: Treasury supply dynamics, funding market pressures, and unexpected economic data. Similar dynamics are unfolding across global developed markets as central banks recalibrate their expectations for policy normalization.
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