The US Treasury market experienced a broad decline on Friday, with the yield curve showing pronounced bear-flattening dynamics. Following the release of a robust May non-farm payrolls report, market pricing for potential interest rate hikes in the coming months surged significantly. Overnight index swap (OIS) contracts linked to Federal Reserve meeting dates now fully price in a 25-basis-point rate hike by the end of this year. Short- and intermediate-term Treasuries led the losses, pushing the spread between 5-year and 30-year yields to its narrowest level since April 2025.
Just after 3:00 PM New York time, Treasury yields were trading near their daily highs. The 2-year yield climbed approximately 12 basis points on the day, while longer-dated yields rose between 3 and 4 basis points. Amid the intense curve-flattening move, the 2s10s spread and the 5s30s spread tightened by 4.5 basis points and 6.5 basis points, respectively, during the session.
Most of the decline occurred in the early trading session, primarily driven by the strong May employment report. Subsequently, OIS contracts tied to Fed meeting dates shifted to a more hawkish stance, fully pricing in a 25-basis-point hike by December and anticipating the policy rate peak to rise above 4% by the middle of next year.
The selloff in short-dated Treasuries following the jobs report was exacerbated by a series of block trades in December federal funds futures. These contracts remained under persistent pressure as market expectations for future rate hikes continued to soar.
As of 4:18 PM Eastern Time, the key Treasury yields were as follows:
The 2-year Treasury yield stood at 4.1574%.
The 5-year Treasury yield was at 4.2796%.
The 10-year Treasury yield reached 4.5403%.
The 30-year Treasury yield was at 5.0048%.
The spread between 2-year and 10-year Treasury yields was 38.08 basis points.
The spread between 5-year and 30-year Treasury yields was 72.35 basis points.
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