2-Year Treasury Yield

What It Measures

The 2-Year Treasury Yield represents the return on lending to the U.S. government for 2 years. Because of its shorter duration, it's highly sensitive to Federal Reserve policy expectations and is considered the best market-based predictor of where the Fed will set interest rates.

Why It's Important

• Fed Policy Proxy: The 2Y yield embeds market expectations for the next ~8 Fed meetings. It often moves before the Fed acts.
• Yield Curve Component: The spread between 10Y and 2Y yields (yield curve) is a key recession indicator.
• Short-Term Rates: Influences auto loans, credit cards, and other consumer borrowing tied to short-term rates.
• Bank Profitability: Banks borrow short (deposits) and lend long (mortgages). The 2Y affects their funding costs.

Relationship to Fed Funds

• 2Y Above Fed Funds: Market expects rate hikes. The bigger the gap, the more hikes expected.
• 2Y Below Fed Funds: Market expects rate cuts. Often precedes economic slowdowns.
• 2Y Equals Fed Funds: Market expects steady policy (rare).

Historical Context

• 2006-2007: 2Y hit 5%+ before the financial crisis
• 2008-2015: Near zero during ZIRP (zero interest rate policy)
• 2018-2019: Rose to 2.5-3% during Fed tightening cycle
• 2020: Crashed to 0.1% during COVID panic
• 2022-2024: Surged to 4-5% as Fed fought inflation

Trading Signals

• Rapid Rise: Fed hiking cycle underway. Bearish for rate-sensitive stocks (REITs, utilities, growth).
• Rapid Fall: Market pricing in cuts. Often signals recession fears or crisis. Bullish for bonds.
• 2Y > 10Y (Inversion): Classic recession warning signal. Historically precedes recessions by 6-18 months.