US Treasuries approached a key milestone Tuesday as 10-year yields reached the highest level relative to two-year rates in nearly nine months, signaling traders’ bets on further Federal Reserve interest-rate cuts in 2026.
While Tuesday’s moves were small, the 10-year briefly exceeded the two-year by more than 72 basis points for the first time since April. In a move known as yield-curve steepening, the shift is rooted in expectations for further Fed policy easing. A surge in corporate-bond sales to start the year is exacerbating the dynamic, by pressuring long-term yields higher.
The differential between two- and 10-year yields has scope to reach a percentage point this year, the widest since 2021, as the maturities’ rates fall to about 3% and 4%, respectively, said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. The two-year yielded about 3.47% Tuesday, and the 10-year around 4.18%, with the market focused on key employment data to be released over the next few days.
The curve “will grind steeper because the economy is in good shape and a weak labor market keeps the Fed in play,” he said. “While there doesn’t seem to be a big risk of any jump higher in rates, the long end will have a tough time coming down unless something bad for the economy happens.”
Yields remain below last year’s peak levels, however the short-maturity tenors that are most sensitive to Fed rate changes have declined most. The differential between two- and 10-year yields was less than 50 basis points as recently as November.
It has expanded amid a resurgence in corporate-debt issuance, which ground to a halt in mid-December. About 22 issuers were looking to sell investment-grade bonds Tuesday, on the heels of Monday’s 20 offerings, which raised more than $37 billion, the market’s busiest day in months.
Soft demand for an auction of 10-year Japanese government bonds that lifted yields in that market was also a factor, said Tom di Galoma, managing director at Mischler Financial Group. Yields were lower on the day in most European government bond markets, a rally spurred by benign German regional inflation gauges.
Meanwhile, Fed policy makers are expected to lower their target range for US overnight lending rates further this year, following three quarter-point cuts in September, October and December in response to signs of labor-market softening.
The market-implied expectation for a quarter-point cut by mid-year and another by year-end were little changed Tuesday. However, Fed Governor Stephen Miran, speaking on Fox Business Network, said more than a full percentage point of cuts were needed this year. Miran took office in September and repeatedly dissented in favor of half-point cuts.
Several other Fed officials — citing inflation that continues to exceed the central bank’s 2% target and indications that financial conditions remain accommodative — have argued in favor of pausing rate cuts beginning this month. Traders assign a low probability to a cut on Jan. 28, the Fed’s next scheduled decision.
