Key Highlights

  • On October 22 the 10-year yield was 31 basis points above the 2-year and 74 basis points above the 3-month bill (calculated).
  • The 2-year to 10-year gap was 40 basis points on September 1 and 51 basis points on May 1 (calculated).
  • The 2-year yield climbed from 4.39% on September 1 to 4.65%, whereas the 10-year climbed from 4.79% to 4.96%.
  • The 3-month bill yielded 4.22% against an effective federal funds rate of 3.88%.
  • Valley National disclosed a net interest margin of 3.28% versus 3.05% a year earlier.

Yield Curve: What Is It Telling Investors Right Now?

The yield curve plots Treasury yields from one month to 30 years. Normally it slopes upward, because lenders want more for tying up money longer. An inverted curve, with short rates above long rates, has historically often preceded recessions.

Today's curve is not inverted. On Thursday, October 22, the Treasury's par curve showed 4.22% for 3 months, 4.65% for 2 years, 4.78% for 5 years, 4.96% for 10 years and 5.29% for 30 years. The 10-year was therefore 31 basis points above the 2-year and 74 above the 3-month bill (calculated).

Fed Hikes: Why Has the Curve Flattened Whereas Staying Upward Sloping?

The Federal Reserve raised its target range to 3.75% to 4.00% on September 17, and the effective rate is 3.88%. Short yields sit above it: the 3-month bill at 4.22% and the 2-year at 4.65% signal that investors expect more increases, with futures pricing a December move near 94% as of October 20. Every maturity from one year to 30 years yields over the effective policy rate.

That has flattened the curve. The 2-year yield climbed 26 basis points from September 1 to October 22, whereas the 10-year climbed 17, so the 2-year to 10-year gap narrowed from 40 to 31 basis points (calculated). It was 51 basis points on May 1.

Thursday's rally was broad. The 2-year declined 16 basis points and the 10-year 17, so the spread barely moved. The 20-year, at 5.32%, continues to be marginally above the 30-year at 5.29%.

Which Banks and the Curve: Who Gains From the Current Shape Details Stand Out?

Bank margins reflect the gap between what lenders earn and pay. Valley National (NASDAQ:VLY) disclosed a third-quarter net interest margin of 3.28% on a fully taxable basis, up from 3.05% a year earlier. Huntington Bancshares (NASDAQ:HBAN) disclosed 3.25% versus 3.21% during the second quarter and guided to a approximately unchanged fourth-quarter margin.

Not every borrower benefits. PulteGroup (NYSE:PHM) stated rising rates had stretched housing affordability, and its third-quarter EPS declined to $2.53 from $2.96. Long yields near 5% set mortgage and corporate borrowing costs, not just the Fed's policy rate.

Which Upcoming Developments Matter for Will the 2-Year Keep Rising Faster Than the 10-Year?

The October 27 to 28 Federal Open Market Committee meeting is the forthcoming test of how many increases the front end must price. The October consumer price report on November 10 comes after. If oil keeps lifting inflation, the 2-year could keep outrunning the 10-year, which would narrow the gap further.