Two-year Treasury yield hits a multi-year high as the curve flattens

The two-year US Treasury yield reached a new multi-year high after the Federal Reserve raised rates on Wednesday and Chair Kevin Warsh’s remarks left markets with the impression that more increases could come^1,4. The front end stepped up again, with two-year yields at 4.75 per cent, the highest since 2024⁵. Intraday, the two-year touched its highest level since July 2024².

The Fed increased its target range by 0.25 percentage points, to 3.75 per cent to 4.00 per cent⁹. The dot plot published alongside the decision showed 16 of 18 Fed officials penciling in another rate hike this year, and Warsh delivered a hawkish speech⁶.

Why it matters to investors

The curve has kept flattening since the decision, with the spread between two- and ten-year yields narrowing². That spread was last at 25.5 basis points, after earlier reaching 23.8 basis points, the flattest since June 25³. At 4.75 per cent the front end is close enough to ten-year yields that traders have started to think about inversion again⁵.

The sell side is positioning for more. Bank of America has warned that Warsh’s Fed could raise rates above 5 per cent, a repeat of 2022⁷, and the same strategists are recommending that clients short two-year Treasuries⁸. Warsh was careful not to commit to any future move while reaffirming his dissatisfaction, according to their note⁷.

What to watch

The direction is not one-way. US Treasury yields fell on Friday, mirroring the broader global bond market, as the curve flattened further¹⁰. The flattening, not the level, is the signal: it says the market expects tightening to bite growth rather than to persist at the long end^2,3. A front end that keeps rising while the long end stalls is the market pricing a shorter, sharper cycle rather than a durably higher rate structure^2,5.

The gap between the committee and the curve is the thing to size. The dot plot points to one more increase⁶; the front end is priced as though there could be more than one, and Bank of America has told clients to position for a peak above 5 per cent^7,8. Chair Warsh’s reluctance to give forward guidance leaves that gap open rather than closing it, which is why the repricing continued for days after the meeting itself^1,4.

Two things settle the argument from here: whether the additional hike in the dot plot arrives⁶, and whether the two-to-ten spread crosses zero from its current handful of basis points^3,5.