Type 2 diabetes (T2D) increases skeletal fragility and fracture risk; however, the underlying mechanisms remain to be identified. Impaired bone vascular function, in particular insulin‐stimulated vasodilation and blood flow is a potential, yet unexplored mechanism. The purpose of this study was to determine the effects of T2D on femoral biomechanical properties, trabecular microarchitecture, and insulin‐stimulated bone vasodilation by comparison of hyperphagic Otsuka Long‐Evans Tokushima Fatty (OLETF) rats with normoglycemic control OLETF rats. Four‐week old, male OLETF rats were randomized to two groups: type 2 diabetes (O‐T2D) or normoglycemic control (O‐CON). O‐T2D were allowed ad libitum access to a rodent chow diet and O‐CON underwent moderate caloric restriction (30% restriction relative to intake of O‐T2D) to maintain normal body weight (BW) and glycemia until 40 weeks of age. Hyperphagic O‐T2D rats had significantly greater BW, body fat, and blood glucose than O‐CON. Total cross‐sectional area (Tt.Ar), cortical area (Ct.Ar), Ct.Ar/Tt.Ar, and polar moment of inertia of the mid‐diaphyseal femur adjusted for BW were greater in O‐T2D rats versus O‐CON. Whole‐bone biomechanical properties of the femur assessed by torsional loading to failure did not differ between O‐T2D and O‐CON, but tissue‐level strength and stiffness adjusted for BW were reduced in O‐T2D relative to O‐CON. Micro–computed tomography (μCT) of the distal epiphysis showed that O‐T2D rats had reduced percent bone volume, trabecular number, and connectivity density, and greater trabecular spacing compared with O‐CON. Basal tibial blood flow assessed by microsphere infusion was similar in O‐T2D and O‐CON, but the blood flow response to insulin stimulation in both the proximal epiphysis and diaphyseal marrow was lesser in O‐T2D compared to O‐CON. In summary, impaired insulin‐stimulated bone blood flow is associated with deleterious changes in bone trabecular microarchitecture and cortical biomechanical properties in T2D, suggesting that vascular dysfunction might play a causal role in diabetic bone fragility. © 2017 The Authors. JBMR Plus Published by Wiley Periodicals, Inc. on behalf of the American Society for Bone and Mineral Research.