Short-Term Treasury Yields Surge as Fed Hike Bets Rise
Two-year Treasury yields have climbed about 55 basis points in September as markets price a roughly two-thirds chance of an October rate increase.
Rising expectations for another Federal Reserve rate increase are driving a sharp move higher in short-term Treasury yields, tightening financial conditions as the U.S. Treasury weighs how to manage its growing debt burden.
The two-year Treasury yield has risen about 55 basis points since the start of September, while the gap between 10-year and two-year yields briefly narrowed to roughly 17 basis points, its smallest level since early 2025.
Markets now put the probability of an October rate increase at about two-thirds and are pricing at least three quarter-point increases over the next year. Since a hawkish late-August speech at Jackson Hole, real yields on two-year and five-year Treasury inflation-protected securities have climbed about 57 and 64 basis points, respectively.
The shift leaves Treasury Secretary Bessent facing a debt-management trade-off. Continued reliance on short-term Treasury bills avoids locking in higher long-term borrowing costs, but repeated refinancing would raise the government's interest expense if rates keep rising. Extending maturities would provide more certainty while locking in those elevated costs.
The Treasury's next quarterly refinancing plans are due Nov. 4, providing the next concrete indication of how it will balance those risks.
