Central Banks' Shift Sparks Repricing Risk for Global Yields

Mark Cabana, Co-Head of Global Rates Research at Bank of America, is warning that markets may be underestimating how far short-term interest rates could climb. According to Cabana's team, the front end of the global yield curve faces meaningful repricing risk to the upside as central banks dial back their accommodative stance.

The bank has been recommending that clients consider short positions in Secured Overnight Financing Rate (SOFR) futures and Federal Funds futures. The team also sees specific Overnight Index Swap (OIS) contracts tied to upcoming FOMC meetings as tactical opportunities, with current pricing deemed 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.

The warning isn't limited to the US, with Cabana flagging 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.