Something has drastically shifted in the bond market, and it's offering negative cues to risk assets, including bitcoin BTC$64,010.98.
The gap between the U.S. 10- and two-year Treasury yields has narrowed to just 28 basis points, the tightest spread since April 2025, according to data source TradingView.
That's what's known as yield curve flattening, and it's flashing “the clearest market signal that the Fed is getting more hawkish,” according to Skanda Amarnath, executive director of EmployAmerica, a policy research organization focused on monetary, fiscal, and industrial-level policies.
A more hawkish Fed generally means higher interest rates for longer, and that's bad news for bitcoin and other assets that offer no inherent yield. As expectations for higher interest rates firm up, fixed-income investments become more attractive relative to non-yielding risk assets like crypto, often pulling capital away.
The flattening isn't isolated to the 10-year/2-year spread either. The gap between 30-year and 5-year yields has also narrowed to its lowest level since April of last year, reinforcing the broader shift.
The move marks a notable reversal from the start of the year, when the curve was steepening, a sign markets were pricing in rate cuts, which were then cited as a tailwind for risk assets including cryptocurrencies. That tailwind now looks like it's fading.
Here's why the curve matters
Bonds serve as one of the channels through which monetary and fiscal policies are transmitted into markets and the economy. Hence, shifts in the bond market curve or spreads are often clearer and more reliable signals of impending policy changes than individual analyst commentary.
The two-year yield moves closely with expectations for near-term Fed policy, while the 10-year yield reflects where markets see growth and inflation over the longer haul.
Under normal conditions, the curve (the spread between the two) slopes upward as investors demand extra compensation, or a premium, to lock up their money for longer periods, pushing the 10-year yield above the two-year yield.
When that gap narrows, it usually means one of two things: investors are pricing in higher interest rates for longer, which keeps the two-year yield elevated, or they're growing more pessimistic about long-term growth, which pulls the 10-year yield down.
Right now, the move looks like the former, especially in the wake of Wednesday's Fed decision, in which the central bank held interest rates unchanged, but the broader messaging leaned hawkish.