The move marks a notable reversal from earlier in the year, when the curve steepened, a sign that markets were anticipating rate cuts, which were later cited as a tailwind for risk assets, including cryptocurrencies. This tailwind now appears to be fading.
Here’s why the curve is important
Bonds are one of the channels through which monetary and fiscal policies are transmitted to markets and the economy. Therefore, changes in the bond market curve or spreads are often clearer and more reliable signals of an impending policy change than comments from individual analysts.
The two-year yield moves closely with expectations for short-term Fed policy, while the 10-year yield reflects markets’ long-term growth and inflation prospects.
Under normal conditions, the curve (the gap between the two) tends upward as investors demand additional compensation, or a premium, to lock up their money for longer periods, pushing the 10-year yield above the two-year yield.
When that gap narrows, it generally means one of two things: Investors price in higher interest rates for longer, which keeps the two-year yield high, or they become more pessimistic about long-term growth, which pushes the 10-year yield lower.
As of now, the decision resembles the first, particularly following Wednesday’s Fed decision, in which the central bank kept interest rates unchanged, but the broader message was rather hawkish.
