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Oct 11 - 10:55 AM

BofA: Here are the US Rate Shock FAQs

By eFXdata  —  Oct 11 - 09:42 AM

Synopsis: BofA addresses frequently asked questions on the pronounced increase in US real rates.

Detailed Analysis:

  • Q: Why are rates rising? A: Three main factors contribute to the rate rise: robust US growth, supply and demand dynamics, and the challenges to existing positions.

  • Q: What could halt this rise? A: A macroeconomic slowdown or risk-off sentiment, removal of anticipated cuts, or a policy shift from the Federal Reserve could counteract the rate increase.

  • Q: How many rate cuts could be removed? A: BofA believes at least 100 basis points (bp) of cuts remain possible over 2024-2025.

  • Q: Where might rates peak? A: BofA forecasts that the 10-year rate could peak close to 5%, assuming the Federal Reserve stays its course.

  • Q: Who's selling? A: Fast money entities, banks, and foreign officials are the primary sellers. Currently, there's a shortage of buyers in the market.

  • Q: Who might emerge as the bond buyers? A: At present, domestic asset managers are the primary bond buyers. However, the Federal Reserve could emerge as a major purchaser in the future.

  • Q: Is the US fiscal policy sustainable? A: No. Despite the unsustainability of the current fiscal policy, BofA doesn't anticipate significant changes in the near term.

  • Q: Is the Federal Reserve concerned about the rate hike? A: Absolutely. The Fed recognizes that higher rates can lead to slower economic growth and elevate financial stability risks.

  • Q: How should one account for geopolitical risk in this context? A: Geopolitical risks typically drive rates lower due to the "flight to quality" phenomenon.

Conclusion: BofA sheds light on the pressing questions concerning the sharp rise in US real rates, highlighting factors from robust US growth to geopolitical risks

BofA Global Research


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