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Monday, September 28, 2026
US bond market is flashing a new warning as Fed rate fears grow
By Vijay Valecha in 'Century in News'
Vijay Valecha, Mon, Sept 28, 2026 Gulf News
Flattening yield curve is shifting focus from inflation to the risk of Fed over-tighteningDubai: The US bond market is beginning to send a different message to investors, shifting the focus from stubborn inflation and rising long-term borrowing costs towards the risk that the Federal Reserve could eventually tighten monetary policy too far.
The gap between two-year and 10-year US Treasury yields narrowed to just 17 basis points last week, its smallest since early 2025, according to market strategist Stephen Innes, bringing one of Wall Street’s most closely followed recession indicators back into focus.
The pressure has moved to shorter-term bondsThe source of the rise in US borrowing costs has also changed.
Earlier in the year, much of the pressure came from longer-dated Treasury bonds as investors demanded higher returns amid concerns about inflation and the outlook for interest rates.
Shorter-term yields are now taking a bigger role as markets price the possibility of further Fed increases.
Rising yields reach beyond the bond marketHigher government bond yields can feed through financial markets because they affect borrowing costs and the relative attractiveness of equities and other assets.
Vijay Valecha, Chief Investment Officer at Century Financial, said the rise has become a global issue.
“Global bond yields are also climbing, with the broad global average moving above 4% last week for the first time since 2007, a headwind for equity valuations,” Valecha said.
Banks typically borrow over shorter periods and lend over longer ones, making the difference between short and long-term rates important to their business. According to Innes, the KBW Bank Index fell into correction territory last week, around 10% below its recent high.
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