Treasury Yields: Two-Year Note at 4.75% Draws Buyers as Rate Options Signal Fed Overshoot Bets

Investors are returning to two-year U.S. Treasuries at roughly 4.75%, betting the Federal Reserve's tightening path is overpriced and that any inflation improvement will spark a bond-price recovery. The two-year yield, the maturity most sensitive to Fed policy, has climbed about 140 basis points from its February low. The Fed raised rates by a quarter-point to 3.75%-4% on Sept. 16, its first hike since July 2023, with all 12 FOMC members voting in favor. Futures and swap markets now price another 10 to 80 basis points of tightening over the next year, with some curve pricing implying a policy rate near 4.68% by September 2027. WisdomTree's Kevin Flanagan said the short end may have "gone too far," making it the most mispriced part of the curve. Options tied to SOFR are drawing buyers positioned for lower rates, and Allspring's George Bory and Barings' Trevor Slaven both cited the 4.75% coupon as an attractive cushion. The main risk: a Middle East or Russia-Ukraine energy shock reigniting inflation and forcing the Fed above 5%. Bank of America strategists flagged that scenario. A $69 billion two-year auction on Tuesday (Sept. 22) will test demand.