BofA Warns Markets Underprice Fed's Rate Hike Cycle

Bank of America (BofA) has warned investors to prepare for the possibility that the Federal Reserve could raise its benchmark interest rate back above 5%, saying financial markets are underestimating how high the Fed will ultimately push rates.

The bank's strategists, Mark Cabana and Meghan Swiber, said in a report that the Fed could lift rates to levels comparable to its 2022-2023 tightening cycle, when the upper bound of the federal funds rate soared to 5.5%.

BofA said markets are underpricing the terminal rate for the Fed's current rate-hike cycle and recommended that investors position for further upside in the 2-year US Treasury yield in particular.

The bank specifically forecast that the 2-year Treasury yield could climb to 5.25%, matching the peak it hit in 2023, while also saying that even a fundamental economic analysis points to a higher appropriate Fed rate than markets currently anticipate.