Monday was the kind of day that usually moves every market in the same direction. Oil fell, stocks rose, long-dated bond yields came down. The S&P 500 gained 1.49 percent to 7,764.70, its best day since 4 August, according to CNBC. The Nasdaq Composite rose 2.26 percent to 27,122.09, its first record close since June. US crude fell 4.5 percent to $95.78 a barrel and Brent 3.4 percent to $100.34.
The ten-year Treasury yield fell to 4.96 percent on Treasury's daily curve, from 5.01 percent on Friday. The thirty-year fell by the same amount.
The two-year yield closed at 4.76 percent. That is exactly where it closed on Friday, and the highest since 1 July 2024.
The maturity that trades on the Fed
The two-year note is the part of the curve most closely tied to what investors expect the Federal Reserve to do over the next two years. Longer maturities also carry views on growth, deficits and the value of holding a bond for a decade. Monday's rally ran through those. Cheaper oil means less inflation later and less pressure on long-term rates. It did nothing for the two-year, because the two-year is not pricing oil. It is pricing the Fed's response to the oil already in the economy.
That response is still being counted. On 16 September the Fed raised its target range by a quarter point to 3.75 to 4 percent, its first increase since 2023. According to the projections released that day, twelve of eighteen officials expect another increase before the end of the year. The effective federal funds rate, the rate banks actually pay each other overnight, has been 3.88 percent since the decision took effect.
The yields above it show how far investors think this goes. The three-month bill yields 4.17 percent, the one-year 4.45 percent and the two-year 4.76 percent. Every maturity sits above the overnight rate, and each is higher than the one before. A two-year yield 88 basis points above the policy rate cannot be explained by holding rates where they are. Some of the gap is compensation for lending for two years rather than overnight. The rest is a bet on more increases.
A month of repricing, and none of it undone
The move has been fast. The two-year yielded 4.17 percent on 25 August and 3.38 percent in late February, its low for the year. It ended 2025 at 3.47 percent. That is 129 basis points of increase this year, and 59 in the last four weeks alone.
It also kept rising after the Fed acted. The two-year closed at 4.67 percent the day before the decision. Short yields often peak once a widely expected increase is delivered. This time the two-year is nine basis points higher than on the eve of the decision.
The shape of the curve says the same. At the end of August the ten-year yielded 41 basis points more than the two-year. On Monday the gap was 20. Short rates are catching up with long ones, which is the usual pattern when investors expect a central bank to keep tightening. That is a change of emphasis. Earlier this month, as we reported on 7 September, the pressure was at the long end, on worries that no Fed meeting could settle. Now it is at the front.
What the strategists said
The oil-driven case was put plainly on Monday. "Higher-for-longer energy prices add to the case for further tightening," Ed Yardeni of Yardeni Research wrote in a note quoted by CNBC. "The longer this energy shock persists, the greater the risk of second-round inflation effects." Jeffrey Roach, chief economist at LPL Financial, said the Fed under Chair Kevin Warsh "has conditioned its inflation outlook on oil markets settling down."
That is the tension. If the Fed has tied its outlook to oil, a lasting fall in crude should eventually pull the two-year down. One day of lower prices was not enough, and the front of the curve is waiting to see whether it lasts. Early on Tuesday Brent was down another 1 percent at $98.92, after a report by Japan's Kyodo news agency that Iran had offered to reopen the Strait of Hormuz within seven days. CNBC said it had not independently verified the report.
What to watch
The Fed will do the talking this week. John Williams of the New York Fed and Tom Barkin of the Richmond Fed are scheduled to speak on Tuesday, with more officials to follow. S&P Global's purchasing managers' surveys come out on Wednesday and weekly jobless claims on Thursday.
The test is simple. If oil keeps falling and officials start to sound as if one increase might be enough, the two-year should give back some of its 59 basis points. If it holds near 4.76 percent while crude slides, investors have decided the Fed is looking at inflation already in the data, not at the price of the next barrel. Monday's rally in stocks and long bonds leaves that question open. The two-year has taken the Fed at its word.
Treasury yields for all maturities and dates are from the US Treasury's daily par yield curve rates; the 1 July 2024 comparison is from the two-year constant-maturity series (DGS2) published by the Federal Reserve Bank of St Louis. The effective federal funds rate and SOFR are from the Federal Reserve Bank of New York via FRED. Monday's index closes, the oil settlements, the intraday ten-year and thirty-year yields of 4.951 and 5.284 percent, the ten-year's 19-year high of 5.041 percent last week, the quotations from Ed Yardeni and Jeffrey Roach, and the week's scheduled Fed speakers are as reported by CNBC on 21 and 22 September 2026. The report attributed to Kyodo that Iran offered to reopen the Strait of Hormuz, and Tuesday morning's oil prices, are as reported by CNBC, which said it had not verified the report. The projection that 12 of 18 officials expect another increase this year is from the Fed's September projections as reported at the time. The spread and change calculations are our own, as is the analysis.
Topics marketstreasuriesfederal reserveinterest ratesoil
