The Treasury yield curve bulge forming in the two-year to three-year range is being read by most commentators as a curiosity. The bond market’s own price signals suggest it is closer to a warning.
The three-year Treasury yield spiked by 14 basis points in the week of the Fed’s rate hike, and by 56 basis points since Fed Chair Warsh’s speech at the Federal Reserve Board‘s Jackson Hole symposium on 28 August. Since the end of February it has soared by 144 basis points, closing on Friday at 4.86%, the highest since April 2024. The two-year yield moved in similar fashion: up 13 basis points on the week, up 56 basis points since Jackson Hole, and up 134 basis points since the end of February, closing at 4.76%, the highest since June 2024.
Both yields are now priced well above the Effective Federal Funds Rate: the three-year sits 95 basis points above it, the two-year 88 basis points above it. That gap does not reflect optimism about a policy pivot. It reflects the bond market pricing in multiple additional rate hikes beyond the one already delivered this week.
The 5% Line and What It Is Concealing
The ten-year yield, meanwhile, has been unable to break convincingly above 5%. It closed Friday at 5.01%, after bumping against that threshold repeatedly. The last time the ten-year briefly pierced 5% intraday (on 23 October 2023) demand flooded in and the yield plunged that same day, continuing lower for two months. This time, demand has been sufficient only to stall the move, not reverse it.
The spread between the two-year and the ten-year now sits at just 25 basis points. Between the three-year and the ten-year, it is a mere 15 basis points. During prior periods of economic growth and inflation, the two-year to ten-year spread typically ran in a range of 100 to 250 basis points. The current compression does not suggest the ten-year is fairly valued. It suggests the buyers absorbing supply at 5% are fighting a tide that the shorter end of the curve is already surrendering to.
The Treasury yield curve bulge, visible between the one-year and three-year maturities, is the market’s way of saying the ten-year has not finished moving. The flatter section from the four-year out to the ten-year reflects not complacency but the continued gravitational pull of 5% as a perceived ceiling. When that ceiling gives way (if it does) the adjustment in the ten-year could be abrupt.
The Thirty-Year and What It Tells Us About Normalisation
Away from the psychological focal point of 5%, the thirty-year Treasury yield has been telling a cleaner story. According to PBS News, the rate on the thirty-year bond reached its highest level in 19 years. The yield closed Friday at 5.34%, a range last seen in 2007, the final year before the Fed began purchasing trillions of dollars of Treasury securities and mortgage-backed securities to force long-term yields lower. That experiment ended in early 2022 against a backdrop of 9% inflation.
PBS News also reported that Treasury Secretary Scott Bessent made an unusual effort to buy back bonds and push yields lower. That intervention is worth noting because it runs counter to the direction the curve is signalling. If the bond market’s own pricing mechanism in the two-year and three-year maturities is correct, buying pressure at the long end may slow the adjustment but is unlikely to prevent it.
The Treasury yield curve bulge and the broader normalisation underway are consistent with what Warsh has argued openly. He delivered his financial-conditions-are-not-restrictive assessment at a symposium sponsored by the Federal Reserve Bank of Kansas City, themed “Financial Innovation: Implications for Payments and Policy.” Warsh resigned from the Fed in 2011 as an outspoken critic of its quantitative easing and zero interest rate policies. He has, according to Wolf Street, welcomed the bond market’s return to pricing risk independently.
The consensus read is that 5% on the ten-year is a ceiling the market respects. The two-year and three-year maturities are pricing something different: a ten-year yield that still has considerable distance to travel. If the shorter end is right, the ten-year’s stall at 5% is not a resolution, it is an unfinished argument, and the next Fed meeting becomes the next opportunity for the market to resume making it.
