Bank of America strategists have cautioned that investors need to brace for the possibility that the Federal Reserve could lift its benchmark interest rate above 5%, according to a Bloomberg report. The market remains complacent about the ultimate destination of the current tightening cycle, the team led by Mark Cabana and Meghan Swiber argued, urging clients to position for further upside in two-year Treasury yields.

The strategists believe overnight borrowing costs could revisit the highs of the 2022-2023 hiking campaign, when the federal funds target rate peaked at 5.5%. Meanwhile, they project the two-year Treasury yield will climb to 5% this year from its current level of roughly 4.7%. Fed Chair Kevin Warsh's comments that rate hikes have removed "a degree of accommodation" suggest officials do not yet view monetary policy as constraining economic growth.

"A Fed that does not see policy as restrictive is likely to keep raising rates until financial conditions tighten," the strategists wrote in a note. "This reinforces our confidence in a flatter yield curve." While Warsh carefully avoided committing to any specific future rate action, he reiterated his dissatisfaction with inflation trends and reaffirmed the central bank's resolve to maintain price stability.

In recent trading sessions, investors have ramped up bets on additional Fed hikes, flattening the yield curve as short-end yields outpaced longer-dated ones. Notably, these Bank of America strategists focus on bond market research and trade idea generation, operating independently from the bank's economists who track Fed policy. U.S. economist Aditya Bhave stated that his team maintains its forecast for two more rate increases in October and December of this year, with no policy moves anticipated in 2027.