A closely watched part of the Treasury yield curve is flattening.

The spread between the two-year and 10-year Treasury yield hit its narrowest level since March 2025 this morning, according to FactSet data, in the latest sign that investors are pricing in higher rates.

The spread has been narrowing since February as investors increasingly priced in inflation risks from the conflict with Iran. But the trend has accelerated lately-especially after the Federal Reserve hiked rates last week and penciled in at least one more increase this year.

The 2-year yield closely tracks interest-rate expectations, and its jump higher tells us that investors don't believe that rates will steady soon. Traders are currently pricing in three quarter-point rate hikes over the next year, LSEG data show-a more hawkish view than what Fed officials offered in their most recent dot plot.

At least part of the narrowing has also been driven by investors repositioning, said Mohit Kumar, Jefferies' chief European economist, as traders have rushed out of the so-called steepener trade. The steepener trade is a popular fixed-income bet that the gap between short-term and long-term interest rates will widen.

The problem with the trade, Kumar wrote in a note today, is that almost everyone likes it, so "it can get crowded very quickly." The last two weeks, he added, "is a classic example of crowded positions unwinding and leading to pain on the street."