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Treasury markets navigated an extraordinary confluence of policy signals during the week, with Fed Chair Powell's October 14 speech overwhelming the chaos of the government shutdown entering its 19th day. The 10-year yield's modest 2 basis point decline to 4.01% masked significant intraday volatility, as markets whipsawed between safe-haven flows from trade tensions and concerns about fiscal dysfunction. Powell's acknowledgment that "liquidity conditions are gradually tightening" and quantitative tightening may end "in coming months" provided the week's dominant narrative, cementing expectations for a 25 basis point rate cut at the October 28-29 FOMC meeting with 98% probability priced in fed funds futures.

Credit Spreads at Historic Lows October 2025

Credit markets delivered a remarkable compression to historic tights, with investment grade spreads at 73 basis points reaching the lowest levels since 2010 and positioning at just the 18th percentile of the 5-year range. High yield's 18 basis point tightening to 278 basis points brought spreads to the 23rd percentile, approaching the all-time low of 240 basis points from 2007. This aggressive risk-taking occurred despite the federal government shutdown, Trump's 100% China tariff threat, and repo market stress episodes, highlighting how technical factors and the search for yield have completely overwhelmed fundamental analysis. The disconnect between compressed spreads and elevated systemic risks suggests dangerous complacency.

Federal Reserve Policy Outlook

The Federal Reserve enters its October 28-29 FOMC meeting in an unprecedented position—making critical policy decisions without September inflation data, retail sales, or comprehensive employment statistics due to the government shutdown. Powell's October 14 pivot toward ending quantitative tightening reflects growing concern that the Fed's balance sheet reduction has gone too far, with repo market stress episodes validating these fears. Markets have fully embraced the dovish narrative with 98.1% probability of a 25 basis point October cut and 87% chance of another December reduction bringing fed funds to 3.50-3.75%.

The intellectual framework for simultaneous rate cuts and QT cessation rests on Powell's distinction between interest rate policy addressing economic conditions and balance sheet policy ensuring financial system plumbing. Yet this neat separation ignores how ending QT while cutting rates could reignite inflation expectations just as tariffs create supply-side price pressures. The Committee must navigate this without updated dot plots until December, leaving markets to divine intentions from Powell's press conference—potentially the most consequential since the inflation fight began. The data void may paradoxically give the Fed cover for aggressive easing, arguing uncertainty justifies insurance cuts.

Week Ahead: FOMC Decision Without Data Compass

• FOMC Meeting (October 28-29): Most important Fed meeting in years as Committee addresses QT cessation, rate cuts, and tariff implications without September economic data. Powell's press conference becomes critical for 2025 guidance. Markets price 98% probability of 25bp cut.
• November 1 China Tariff Deadline: Trump's 100% tariff threat effective date creates massive event risk. Implementation would trigger immediate credit spread widening and test the technical bid supporting markets.
• Bank of Japan Decision (October 29-30): Governor Ueda signals no urgency for rate hikes despite yen weakness, maintaining divergence from Fed trajectory and supporting carry trade dynamics.
• Data Releases (If Shutdown Ends): Q3 GDP, Core PCE, and employment data would provide first comprehensive economic readings in weeks, but release depends on shutdown resolution.

Credit Market Dynamics and Historic Spread Compression

The compression of credit spreads to 15-year tights amid mounting systemic risks represents the week's most striking paradox. Investment grade spreads at 73 basis points sit at just the 18th percentile of the 5-year range, offering minimal compensation for credit risk despite government dysfunction, trade wars, and recession probabilities rising to 33%. Technical factors proved overwhelming with September's $207 billion investment grade issuance—the fifth-largest monthly total on record—absorbed with 4x oversubscription for quality names. Foreign investors' $309 billion in purchases over 12 months provided persistent bid support, while record money market funds at $7.40 trillion represent dry powder awaiting deployment.

VIX-MOVE divergence signals regime uncertainty: The week revealed an extraordinary anomaly in cross-asset volatility with the VIX remaining elevated at 20-21 (65th percentile) following its spike earlier in October, while the MOVE index remained subdued at just 69, well below the 80 stress threshold and dramatically below the 200 level seen during the March 2023 banking crisis. This divergence—equity volatility elevated while Treasury volatility remained at just 69—historically precedes regime changes as markets struggle to price whether risks are equity-specific or systemic. The MOVE at 69 represents extreme Treasury market complacency given the shutdown, repo stress, and tariff threats. The last comparable VIX-MOVE divergence occurred in early 2007 when credit markets ignored equity warning signals. Today's divergence suggests bond investors view Powell's dovish pivot as sufficient to contain systemic risks, a potentially dangerous assumption given fiscal dysfunction and trade war escalation.

Violent sector rotation beneath calm surface: While index-level spreads compressed, dramatic dispersion emerged across sectors. Energy credits widened 25-40 basis points as WTI crude declined to $60-64 per barrel with global oil markets in surplus per IEA data. Utilities outperformed with issuance surging 18% year-over-year on data center power demand, accessing capital at historically favorable terms. Technology credits benefited from AI infrastructure spending with Oracle and major tech issuers seeing razor-thin new issue concessions. Financials experienced October 17 whipsaw volatility—initially selling off on regional bank concerns before recovering on regulatory relief expectations. Retail and consumer discretionary faced pressure from tariff implementation fears, while REITs rallied on rate cut expectations. This rotation intensity beneath compressed index spreads reveals significant positioning adjustments.

Maturity wall creates slow-motion crisis: Beneath the calm, a refinancing tsunami builds with $475 billion in high-yield bonds and leveraged loans maturing 2025-2027, followed by an unprecedented $674 billion spike in 2028—41% more than the prior three years combined. Critically, 27% of 2025 maturities are rated Caa or lower in distressed territory, with 52% of year-to-date defaults occurring via distressed exchanges that historically see 35% re-default rates within 48 months. The current environment of compressed spreads provides a narrow window for refinancing, but any spread widening could trap weaker issuers. With leveraged loan default rates already elevated at 6.9-7.5% versus 3.1-4.5% for high yield bonds, the loan market shows early stress that typically precedes broader credit deterioration. Asset managers holding $700 billion net long Treasury futures versus leveraged funds' $800 billion net shorts creates additional positioning risk when this refinancing wave hits.