Bank of America Corp. strategists, including Mark Cabana and Meghan Swiber, warn investors to prepare for the Federal Reserve raising its benchmark rate above 5%, arguing markets underestimate the hiking cycle's endpoint. Swaps imply three more quarter-point hikes to a 4.5%-4.75% range, but BofA sees potential for rates to revisit the 5.5% peak from the 2022-2023 cycle. The team forecasts two-year Treasury yields rising to 5% this year, from ~4.7%, and recommends shorting two-year Treasuries with a 5.25% yield target.

Comments from Chairman Kevin Warsh that Wednesday's hike removed a "dose of accommodation" suggest officials don't yet view policy as restrictive, supporting a flatter yield curve. The Fed's Summary of Economic Projections shows greater upside inflation risk, and a Taylor rule measure implies a 5.3% funds rate. While BofA economists, led by Aditya Bhave, project only two more hikes in October and December, strategists cite simple frameworks suggesting Fed funds should exceed 5%.

They expect limited pass-through to longer tenors, with the 10-year yield finishing near 5%.