BofA's front-end short needs twice the Fed hikes swaps are pricing

The position counts six quarter-point hikes where the curve counts three ^[13].

Swaps price roughly three more 25 basis point moves, landing the target range at 4.50-4.75%, according to cryptobriefing.com's account of the BofA research ^[6]. Work back and the range they are climbing from is 3.75-4.00% ^[12]. BofA's 5.5% figure ^[5] sits 75 basis points above that priced peak, three moves beyond it ^[13].

How much depends on how the 5.5% is read. The account is undated, gives no spot two-year yield, and does not specify whether 5.5% is a top or a midpoint ^[16]. Read as a top, the gap is 75 basis points. Read midpoint to midpoint, against the 4.625% middle of 4.50-4.75%, it is 87.5, or three and a half moves ^[14].

The cash leg asks for more. A two-year Treasury above 5% ^[4] yields at least 25 basis points more than the highest overnight rate swaps expect the Fed to reach ^[15]. Either the terminal is higher than the curve says, or something other than policy is setting the price of a two-year note.

Supply is the candidate BofA itself puts forward, and it calls the factor underappreciated. The Treasury has been issuing significant volumes of short-term bills, and a surge without corresponding demand pushes yields up mechanically ^[9]. That leg pays off the issuance calendar. In its weekly notes the bank keeps what it describes as a "paid bias" on front-end US rates, meaning it expects to profit from rates moving higher ^[7]. It names Treasury supply, funding market pressures and unexpected economic data as the three things it is monitoring ^[8]. The third cuts both ways.

In my view the supply half of the argument is the sturdier one. Bill issuance lifts front-end yields with no committee vote involved ^[9], while the policy half requires a central bank that the market has priced for three hikes to deliver six ^[13]. Cabana's framing extends past the US, with developed-market curves facing the same stubborn inflation ^[10], so the same test applies to each of them. Two outcomes would make the call wrong in different ways. An inflation print soft enough to pull the priced path below three hikes takes the policy leg out. And if the two-year is already trading above 5%, the repricing BofA describes as mispriced ^[11] has been paid, and the recommendation describes the past.