The US Treasury yield gap is narrowing: Fed Warsh could extend the rate hike

The financial markets are currently observing a narrowing of the spread between US Treasury long and short-term rates, a phenomenon that could signal a more restrictive monetary policy from the Federal Reserve (Fed). This dynamic, analyzed by CryptoBriefing, occurs in a context where traders anticipate a hawkish stance under the leadership of Christopher Warsh, set to head the Fed in 2025. Warsh, known for his support of high interest rates, could extend the period of restrictive rates, impacting both crypto and traditional markets. What Happened In May 2026, the spread between US 10-year and 2-year Treasury rates narrowed from 50 basis points to 30 basis points, a level close to an inverted yield curve. This situation, often associated with recession expectations, led traders to adjust their forecasts. According to CME FedWatch data, the probability that the Fed keeps rates between 5.25% and 5.50% until the end of 2026 is now estimated at 70%, up from 40% a month ago. Christopher Warsh, former Under Secretary of the Treasury under the Trump administration, has repeatedly expressed support for a more restrictive monetary policy to combat persistent inflation, particularly in the tech sector. This stance contributed to a decline in US Treasury bond yields (-0.15%), while tech stocks (Nasdaq) fell by 1.8%, reflecting risk aversion. In the crypto sector, Bitcoin ETFs (IBIT, FBTC) saw net outflows of $120 million over the week, signaling institutional investor disengagement. Meanwhile, stablecoins like USDC and USDT saw a 15% increase in trading volume on platforms like Coinbase and Kraken, indicating a shift toward less volatile assets. Why It Matters The narrowing of the yield curve is often interpreted as a sign of prolonged restrictive monetary policy. Such an approach could limit overall liquidity, making borrowing more expensive for businesses and individuals. For crypto markets, this typically results in reduced institutional inflows and increased volatility, as investors favor less risky assets like bonds or stablecoins. In the short term, this dynamic has heightened investor caution, leading to an average 3% decline in altcoins and persistent pressure on Bitcoin. If the Fed maintains its restrictive policy, Bitcoin and Ethereum ETFs could face further outflows, limiting institutional adoption of cryptocurrencies. Stablecoins, however, may continue to gain traction, with total locked value (TVL) potentially rising by 10% by the end of 2026. Macroeconomically, prolonged rate hikes could slow economic growth, negatively impacting stock markets (down 2% on average) and reducing liquidity for risky assets. Central banks might adopt an even more restrictive stance, exacerbating pressure on financial and crypto markets. To Watch The Fed meeting on June 11, 2026: any indication of maintaining rates at 5.25-5.50% or further tightening could trigger liquidations in crypto markets. The Consumer Price Index (CPI): a drop below 3.2% year-over-year (vs. 3.4% in April 2026) could reassure markets, while an unexpected rise would intensify pressure on the Fed. Bitcoin ETF volume: net outflows exceeding $200 million in a week would signal massive institutional disengagement. The reaction of stock markets: prolonged corrections in tech stocks could further drive risk aversion, including toward cryptocurrencies. The evolution of stablecoins: sustained growth in their trading volume could reflect a lasting shift toward less volatile assets.