RatesMarket noteTuesday 29 September 2026, 09:25
The 2-year yield rose 70bp in a month and flattened the curve
Short yields moved first as the Fed turned to rate increases. The gap between 10-year and 2-year yields fell to 20bp, the smallest since March 2025.
By The Notebook Desk
The 2-year Treasury yield closed at 4.87% on 24 September, 70 basis points above its close on 25 August. Measured over a month of trading, it was the biggest rise since June 2023. The 10-year yield rose 54 basis points over the same days, to 5.18%.
The move did not stop there. Treasury’s daily rates put the 2-year at 4.92% on Monday 28 September, its highest since May 2024.
Why the short end moved first
The 2-year yield is, roughly, the market’s guess of the average policy rate over the next two years, plus a small premium. When expectations for the Fed change, it moves first and most.
Expectations changed a lot this month. The Fed raised its target range by a quarter point to 3.75% to 4% on 16 September, its first increase since 2023. Its projections put the median federal funds rate at 4.1% at the end of this year and at the end of 2027. In June the medians were 3.8% and 3.6%. Officials now expect one more increase and no quick reversal.
Futures agree. On 28 September, CME FedWatch put the chance of another quarter-point increase at the 28 October meeting at 70.9%, up from 55.4% a week earlier.
A flatter curve
Because the 2-year rose more than the 10-year, the curve flattened. The gap between the two fell from 47 basis points on 25 August to 20 on 21 September, the smallest since March 2025. Most of that came around the Fed decision: between 15 and 21 September the gap fell from 33 to 20 basis points. It was back at 32 on 28 September, as the long end caught up.
The whole curve tells the same story. Between 25 August and 28 September, Treasury’s figures show the 3-month bill up 42 basis points, to 4.28%. The 2-year rose 75, the 3-year 76 and the 5-year 71. Further out the rises were smaller: 60 for the 10-year and 39 for the 30-year.
So the biggest moves came between two and five years. That is the part of the curve that covers the next rate increases and how long rates stay high. The bill rose less because it covers only the next few months, and the long bond rose less because its yield depends more on where rates settle in the end.
Why it matters
A curve that flattens because short yields rise is the usual picture of a cycle of rate increases. What is unusual this time is the level. The 10-year yield closed at 5.24% on 28 September, its highest since June 2007.
The rise is also mostly real. The 10-year real yield, the return on inflation-protected bonds, went from 2.32% on 25 August to 2.85% on 24 September. That is 53 of the 10-year’s 54 basis points, which means investors are asking for a higher return rather than protection against more inflation. Our In plain sight item has the breakdown.
A flat curve squeezes lenders who borrow short and lend long. It also cuts the reward for holding long bonds: on 28 September a 10-year note paid only 32 basis points more than a 2-year note. If short yields keep rising faster than long ones, that gap will narrow again, as it did in the week to 21 September.
What to watch
The next input for the Fed is the August report on personal income and outlays, with the PCE price indices, on 30 September at 14:30 Tirane time. The Fed meets next on 27 and 28 October, and again on 8 and 9 December, when officials publish new projections. Until then, the 2-year yield is the clearest daily reading of what the market expects it to do.
Disclosure
This is analysis and opinion, not investment advice.