BofA Sounds Alarm on Potential Fed Rate Hike Above 5%

Investors are being warned to prepare for the possibility of the Federal Reserve raising interest rates above 5% in the near future. According to Bank of America Corp. strategists, the market is underestimating the endpoint of a Fed hiking cycle that started this week.

The team, led by Mark Cabana and Meghan Swiber, believes that swaps imply three more quarter-point hikes, which would take the effective federal funds rate into a 4.5% to 4.75% range. However, BofA sees potential for overnight borrowing costs to revisit the highs from the 2022-2023 hiking cycle, when the target rate reached as much as 5.5%

This warning comes as investors are already bracing themselves for a potentially higher two-year Treasury yields, with BofA urging clients to position accordingly.