BofA Global Research warns of repricing risk for front-end yields as central banks pull back

Mark Cabana, Co-Head of Global Rates Research at Bank of America, is sounding an alarm that markets may be underestimating how far short-term interest rates could climb. His core thesis: the front end of the global yield curve, meaning the bonds and instruments maturing in roughly two years or less, faces meaningful repricing risk to the upside as central banks dial back their accommodative stance.

The case for higher front-end yields

BofA’s rates team has been recommending that clients consider short positions in Secured Overnight Financing Rate (SOFR) futures and Federal Funds futures. The bank has also pointed to specific Overnight Index Swap (OIS) contracts tied to upcoming FOMC meetings as tactical opportunities. These swaps essentially let traders bet on where the Fed’s target rate will land on a given date, and BofA sees current pricing as too dovish relative to the inflation backdrop.

Cabana’s team has projected that two-year Treasury yields could trend above 5%, driven by a combination of persistent inflation, economic resilience, and supply-side pressures in the Treasury bill market. The federal funds rate target, according to BofA’s analysis, could potentially climb toward 5.5% if inflation pressures don’t relent. Current swap pricing reflects only modest further tightening, roughly three additional 25 basis point hikes that would bring the target range to 4.50-4.75%.

Global dimensions of the repricing

Cabana’s warning isn’t limited to the US. He has flagged that the global yield curve is experiencing similar dynamics as central banks across developed markets grapple with stubborn inflation and recalibrate their expectations for policy normalization.

For BofA, the strategic positioning is clear. In its weekly research notes, the bank has maintained what it describes as a “paid bias” on front-end US rates, meaning it expects to profit from rates moving higher. The team is closely monitoring three catalysts: Treasury supply dynamics, funding market pressures, and unexpected economic data that could force markets to recalibrate.

Supply is a particularly underappreciated factor. The US Treasury has been issuing significant volumes of short-term bills to fund government operations, and any surge in supply without corresponding demand could push yields higher mechanically.