Bank of America on Tuesday highlighted a shift in recent macroeconomic data that, in the bank's view, raises the likelihood of a reflation scenario for the U.S. economy. The firm likened current conditions to mini-cycle episodes observed in prior years and said that a combination of stronger expansion probabilities and reduced dispersion across data points points toward growing reflation odds.
BofA estimates the U.S. may be about two years into the present mini-cycle. Given its expectation that these cycles generally run three to four years, the bank said the reflation wave could plausibly dissipate by late 2027 or into early 2028.
On Treasury markets, the bank retains a bullish stance on duration even as it acknowledges that higher reflation probabilities create scope for yields to rise. Importantly, BofA does not anticipate the 10-year Treasury yield will surpass the roughly 5% early-cycle peak seen in this mini-cycle, according to its note.
For traders and portfolio managers, the bank identified specific levels and trade structures for medium-term positioning. BofA views 10-year Treasury yields above the 4.40% to 4.45% range as attractive entry points for medium-term duration exposure in a late-cycle environment where the bank expects fundamental fair value to continue moving lower.
To hedge structural long-duration exposure, BofA recommended several strategies:
- Short 10-year Treasuries versus German bunds - current spread cited at 147 basis points, with a target of 160 basis points.
- 5s30s steepeners - current spread noted at 82 basis points, with a suggested target of 130 basis points.
- 6-month forward 2s10s flatteners implemented in a floor ladder format - currently at 17 basis points versus a 23 basis point curve reference.
- Tactical shorts on 2-year Treasuries - BofA quoted the 2-year at 4.01% with a reset target of 4.25%.
The bank's trade recommendations are presented as hedges and tactical adjustments against the backdrop of its reflation outlook and its durable preference for duration exposure. BofA's note lays out specific spread and yield targets for market participants considering how to position portfolios through the remainder of the mini-cycle horizon.
Editor note: The article presents BofA's assessments and recommended market trades as reported by the bank; it does not add new forecasts or timing beyond the bank's stated view.