2s10s Spread Hits 23bp as US Treasury Yields Diverge
The 2s10s yield curve spread narrowed to 23 basis points while the 10-year Treasury yield fell to 4.961%.
Key points
- The 2s10s yield curve spread narrowed to 23 basis points, its lowest level since March 2025.
- The 10-year Treasury yield fell to 4.961% while the 2-year note stayed near 4.731%.
- Market participants priced in a 53% probability of a Federal Reserve rate hike in October.
The two-year to ten-year Treasury spread narrowed to 23 basis points. This level represents the flattest point since March 2025.
The 10-year yield slipped to 4.961% as oil prices dropped. The 2-year note held near 4.731% despite these global shifts.
Short-term rates resist the decline
Investors priced in a 53% chance of an October Fed hike. This expectation kept the 2-year yield elevated at 4.731%.
The 30-year Treasury yield also fell to 5.296%. These longer-dated yields reacted to falling European bond prices.
Bank margins face immediate pressure
Banks fund operations with short-term debt and lend at long-term rates. The narrowed spread directly compresses their net interest margins.
Financial institutions may tighten loan underwriting standards to protect profitability. This defensive move could slow broader credit growth in the economy.
Inflation signals remain mixed
The ten-year TIPS breakeven rate stayed near 2.317%. This indicates that long-run inflation expectations remain contained.
Chicago Fed President Austan Goolsbee cited strong demand as a driver. He also noted the impact of recent tariff and energy shocks.
