The move marks a remarkable reversal from the start of the year, when the curve steepened, a sign that markets were pricing in rate cuts, which were then cited as a tailwind for risk assets, including cryptocurrencies. That tailwind now appears to be subsiding.
Here’s why the curve matters
Bonds act as one of the channels through which monetary and fiscal policy is transmitted to markets and the economy. Therefore, shifts in the bond market curve or spread are often clearer and more reliable signals of impending policy changes than individual analyst comments.
The two-year rate is close to expectations for short-term Fed policy, while the 10-year rate reflects where markets see growth and inflation in the longer term.
Under normal conditions, the curve (the spread between the two) slopes upward as investors demand extra compensation or a premium to lock in their money for longer periods, pushing the 10-year yield above the two-year yield.
When that gap narrows, it usually means one of two things: Investors are pricing in higher interest rates for longer, keeping the two-year yield elevated, or they’re becoming more pessimistic about long-term growth, pulling the 10-year yield down.
Right now, the move looks like the former, especially in the wake of Wednesday’s Fed decision, where the central bank kept interest rates unchanged, but the broader message leaned hawkish.
