Based on the intraday 2-year Treasury yield of approximately 4.59% and the effective federal funds rate of 3.63%, the spread between the two reached about 96 basis points, the largest since November 2022. Currently, federal funds futures are pricing in about 70% of a 25 basis point rate hike next week, with the market pricing in a path of two rate hikes by March next year. The rapid widening of the spread indicates that the market is re-betting on a higher policy rate path, but it cannot be directly interpreted as the Fed needing to raise rates by nearly 100 basis points. The two-year yield includes both interest rate expectations for the next two years and a term premium.
