Duration Dashboard – Government Shutdown Drives Treasury Rally

The government shutdown that began October 1 created an unprecedented information vacuum that paradoxically strengthened Treasury demand. With the Bureau of Labor Statistics unable to release September payrolls on October 3 and all major economic indicators suspended, investors defaulted to safety positioning. The 10-year yield's decline from 4.12% to 4.03% materialized despite—or perhaps because of—the absence of confirming economic weakness, as uncertainty itself became the dominant market driver. The 2-year yield fell 8 basis points while longer maturities declined 9 basis points, reflecting balanced flight-to-quality flows across the curve.

Credit Pulse – Historic Complacency Meets Violent Reality

Credit markets entered the week at dangerously compressed levels—investment grade at just 70 basis points marked the tightest spreads since 2005—leaving zero margin for error when Friday's trade war escalation struck. The high yield market's 40 basis point widening from 256bp to 296bp represented the sharpest single-week deterioration since April's tariff crisis, yet spreads remain at just the 32nd percentile of their 5-year range, suggesting far more pain ahead if recession risks materialize. The VIX explosion from 16.65 to 21.66—a 30% surge—captured the violence of sentiment shift when President Trump threatened 100% tariffs on all Chinese imports.

Primary issuance froze as volatility spiked: Weekly investment-grade supply collapsed to just $15-25 billion, down 88% from September's record-setting $56.5 billion weekly average. The dramatic pullback from September's monthly record of $226 billion—which had pushed year-to-date issuance to $1.74 trillion—reflected treasurers' unwillingness to price new deals into deteriorating conditions. At least 3-5 transactions were reportedly pulled from the calendar Friday, with syndicate desks reporting negligible investor interest at spreads that seemed attractive just days earlier. Secondary market liquidity remained orderly with bid-ask spreads widening modestly to 3-4 basis points in investment grade and 8-10 basis points in high yield, though dealers noted dramatically reduced risk appetite for inventory positions.

Private Credit Stress Monitor – Cockroaches Emerging

Beneath the relatively orderly public credit markets, private credit stress signals multiplied during the week with two high-profile bankruptcies exposing deteriorating underwriting standards. First Brands Group, an auto parts distributor backed by multiple private lenders, filed for Chapter 11 protection citing liquidity constraints and covenant breaches. More troubling was Tricolor Holdings, a subprime auto lender that collapsed amid allegations of pledging the same collateral to multiple lenders—a fraud that evokes memories of 2008's documentation crisis.

Weekly Fund Flow Tracker – Sentiment Reverses Violently

*Preliminary data including October 10-12 flows

The fund flow reversal captured the week's sentiment shift with surgical precision. Through Wednesday, robust inflows of $10.54 billion suggested investors were buying the dip in bonds amid falling yields. Friday's trade war escalation triggered an immediate reversal—the $10.87 billion swing from inflows to outflows marked the sharpest sentiment reversal since March 2023's banking crisis. Money market funds absorbed $28.2 billion for the week ending October 15, accelerating from the prior week's $19.84 billion as institutional investors prioritized capital preservation over yield.

Federal Reserve Policy Outlook – Easing Into the Unknown

The Federal Reserve faces an unprecedented challenge: calibrating monetary policy without the economic dashboard that typically guides decisions. Market pricing shifted decisively toward continued easing, with fed funds futures showing 96% probability of a 25 basis point cut at the October 28-29 FOMC meeting, taking rates to 3.75-4.00%. The forward curve anticipates at least two additional cuts by year-end, reaching 3.50-3.75% terminal rate by mid-2026.

The minutes' revelation that officials see labor market risks dominating inflation concerns provides intellectual cover for aggressive easing even without confirming data. References to reserves at $3.0 trillion and approaching the end of quantitative tightening "in coming months" added another dovish dimension, signaling the Fed's multi-pronged approach to ensuring financial conditions remain accommodative. Yet the dissent for a larger cut hints at internal debates about whether quarter-point moves are sufficient given accumulating downside risks.

Week Ahead: Data Returns as Shutdown Drags On

• Powell Speech (October 14): Chair Powell addresses National Association for Business Economics, first opportunity to clarify Fed thinking post-minutes. Markets desperate for forward guidance given data vacuum.
• Bank Earnings Begin (October 15): Major banks report Q3 results, providing first real-time window into credit conditions, loan loss provisioning, and commercial real estate exposure absent official economic data.
• China Trade Retaliation Risk: Beijing's response to 100% tariff threat remains unknown. Any escalation in export controls or Treasury selling could amplify Friday's risk-off moves.

Fixed Income Positioning – Fade the Extremes

Tactical opportunities emerge from violent repricing: Investment grade corporates at 78bp now screen cheap versus Treasuries given the Fed's easing bias, but remain expensive versus likely recession scenarios that typically drive spreads to 150-200bp. Focus on defensive sectors—utilities, healthcare REITs, and consumer staples—that traded down sympathetically with cyclicals. Avoid airlines, retail, and any company with >20% China revenue exposure.

High yield offers selective value in specific cohorts: The 40bp widening created entry points in BB-rated energy credits trading at 250-300bp despite oil at $60+ and manageable debt maturities. However, avoid CCC-rated retail and consumer discretionary names where 500bp+ spreads still don't compensate for tariff-driven margin compression. Private credit refugees rated B/B- facing 2025-2026 maturities should trade 100-150bp wider given refinancing challenges.

Duration play crystallizes with 10-year at 4.03%: Establish 70% of target duration exposure at current 4.03% yield, saving ammunition for potential backup to 4.20-4.30% if China retaliates. The 2s10s curve at 53bp offers limited steepening value; better risk-reward exists in 5s30s at 99bp targeting 130-140bp if recession materializes. Avoid Treasury auctions until shutdown resolution provides clarity on fiscal trajectory. Consider TIPS at 1.80% real yields as tariff hedge, though breakevens at 2.23% already price significant inflation risk.

The week's defining lesson: When credit markets trade at historic tights (32nd percentile), any shock triggers outsized repricing. Friday's 40bp high yield widening from an already-tight 256bp base demonstrates the violence of unwinds when positioning is uniformly one-sided. The $10.87 billion fund flow reversal—from massive inflows to outflows in 48 hours—reveals how quickly "buy the dip" morphs into "sell everything" when uncertainty spikes. Private credit's 5.5% default rate versus public market's 32nd percentile spreads represents the cycle's greatest valuation disconnect. Those maintaining 30% cash and 50% Treasuries entering the week captured alpha through redeployment opportunity; those fully invested in tight credit sectors face 3-6 months of underperformance. As October's data vacuum extends into November, one certainty emerges: spreads at the 32nd percentile cannot survive contact with reality when that reality includes government dysfunction, trade wars, and accelerating private market defaults.