BofA Warns Two-Year Yields May Top 5% as Supply Rises
Bank of America sees front-end rates rising sharply due to Treasury issuance and persistent inflation.
Key points
- Bank of America projects two-year Treasury yields will trend above 5% due to inflation and supply.
- The bank recommends shorting SOFR and Federal Funds futures to capture rising short-term rates.
- US Treasury bill issuance is creating mechanical upward pressure on front-end yields globally.
Two-year Treasury yields are projected to exceed 5% as central banks reduce support. Bank of America warns that current market pricing underestimates this upward pressure significantly.
The bank advises clients to short SOFR and Federal Funds futures. They view overnight index swaps tied to FOMC meetings as tactical opportunities for profit.
Front-end yields face upside risk
Markets currently price in only three additional 25 basis point hikes. This implies a federal funds target range of 4.50% to 4.75%. BofA argues this expectation is too optimistic given the inflation data.
The bank sees the federal funds rate climbing toward 5.5% if pressures persist. Persistent inflation and economic resilience drive this higher projection for short-term rates.
Treasury supply drives mechanical yield increases
The US Treasury issues large volumes of short-term bills to fund operations. A surge in supply without matching demand pushes yields higher mechanically. This dynamic remains underappreciated by many market participants.
BofA maintains a paid bias on front-end US rates. They monitor Treasury supply, funding market pressures, and economic data. These factors could force a rapid recalibration of market expectations.
Global central banks recalibrate policy stances
Developed markets face similar dynamics as central banks grapple with stubborn inflation. The global yield curve reflects a shared need for policy normalization. TradingView reports that these trends are not isolated to the United States.
