The gap between 2-year and 10-year Treasury yields closed at 21 basis points yesterday, its flattest since March 2025. During the session it dipped as low as 17.9.
A curve this flat one week after a Fed hike fits a market pricing more tightening than growth. It also helps explain a record Nasdaq and a 2% slide in financials on the same day.
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Banks Took the Hit
The S&P 500 financials index fell 2% and banks dropped 3%. Charles Schwab lost 6.1% and JPMorgan about 3%.
Two pressures stacked up. A flatter curve squeezes lending margins, and Meta's Muse agent revived fears of AI disruption in wealth management.
If the spread stays near 20 basis points, banks go into today's rate-sensitive calendar without their usual margin support.
A Narrower Record
The Nasdaq closed at 27,244.28, up 0.45%, for its second straight record. The S&P 500 finished flat at 7,764.64 and the Dow fell 0.36% to 51,863.69.
Chip stocks rose 2% and extended a six-day winning streak. Thursday's Trump-Xi summit on chip export controls puts a date on that concentration risk.
Oil's Longest Slide in a Year
WTI settled down 0.64% at $89.94. It was the fifth straight loss and the longest losing streak for both benchmarks in more than a year.
Brent sat near $99, down from about $110 last week, as reports tied the selling to hopes for U.S.-Iran diplomacy. Cheaper crude coincided with a 10-year yield steady at 4.955%, just under last week's first 5% print since 2023.
That relief reached the long end but not the 2-year, which is why the curve flattened.
Fed Talk and the Dollar
The dollar index rose 0.13% to a seven-week high of 100.29. St. Louis Fed President Alberto Musalem said more hikes may be needed, and Richmond's Tom Barkin ranked inflation risk above jobs risk.
That message fits a 2-year yield stuck near its highs. Tuesday's 2-year auction was soft and drew the highest yield since May 2023.
The Day Ahead
S&P Global's flash PMIs arrive at 9:45 a.m. ET. Trading Economics shows consensus at 53.9 for manufacturing and 56.5 for services, both above August.
A hot services number would push on the same 2-year yield that flattened the curve.
Fed Governor Michael Barr speaks at 10:05 a.m. EIA inventories follow at 10:30 a.m., with a draw of about 0.7 million barrels expected.
The Treasury sells $70 billion of 5-year notes at 1 p.m. After Tuesday's soft 2-year sale, this auction is the day's clearest test of demand at these yields.
