Treasury Yield Curve Nears Inversion as Fed Rate-Hike Bets Mount; Banks, Utilities Under Pressure

The U.S. Treasury yield curve is flattening sharply and moving toward inversion as surging oil prices fuel inflation expectations and traders price in additional Federal Reserve rate hikes. The 2-year yield now sits only about 22 basis points below the 10-year, down from roughly 75 basis points in February. An inversion — the 2-year rising above the 10-year — is increasingly likely. Janney Montgomery Scott strategist Guy LeBas predicted on Tuesday the spread will narrow to zero rather than widen. The Fed last week raised its benchmark rate to 3.75%-4.00%, and Goldman Sachs chief economist Jan Hatzius expects another hike at the October meeting. Banks and utilities are the most exposed sectors. The S&P 500 financials index fell 1.8% Tuesday, erasing nearly all of its 2026 gains, while utilities have dropped 4.8% year to date. Research from the Cleveland Fed puts the probability of a recession within the next year at just 12.3%, even as inversion fears intensify.