BofA: Front End Expecting Significant Dot Revision

Bank of America note that “2y rates have rallied nearly 40bps in less than 2 weeks, a move guided by dovish Fed comments ahead of the blackout period.”

• “To assess whether this move is overdone, we turn to the historical comparison between the market and dot plot. Assuming the average spread between the market and December FOMC dots, the 2024 dot next week would need to reflect over 100bps of cuts to be consistent with this repricing.”
• “The 3y, however, is significantly above the latest Fed projections and suggests that there is more room for the market to price a lower trough of the cutting cycle.”
• “We continue to favor longs in the belly versus the front end of the curve and see room to fade cuts through a 3m1y OTM (out of the money) payer spread.”