Treasury Spread Hits 9-Month High on 2026 Fed Cut Bets
The US Treasury market signaled a decisive shift in sentiment on Tuesday as the yield curve steepened aggressively, with the spread between 10-year and two-year notes widening to over 72 basis points for the first time since April. This "bull steepener" dynamic is being driven by traders pricing in substantial Federal Reserve interest rate cuts extending into 2026, which anchors short-term yields while long-term rates face upward pressure from other factors. The two-year yield dropped to approximately 3.47%, reflecting these dovish policy expectations, while the 10-year yield held firm around 4.18%.
Beyond policy bets, structural market forces are exacerbating the gap. A massive surge in corporate bond issuance with over 20 offerings raising $37 billion on Monday alone is flooding the market with supply, pressuring long-term yields higher as investors demand better terms to absorb the debt. Simultaneously, conflicting signals from Fed officials are adding volatility; while Governor Stephen Miran advocates for over a full percentage point of cuts this year to support a softening labor market, other policymakers favor a pause due to sticky inflation exceeding the 2% target. Market strategists like Gregory Faranello now predict the spread could widen to a full percentage point (100 bps) this year, a level unseen since 2021, as the market navigates this complex interplay of growth, inflation, and supply.