Duration Dashboard

The FOMC's October 29 decision to cut rates 25 basis points reflected divergent views within the Committee, with Governor Miran preferring 50 basis points of easing while Kansas City's Schmid favored maintaining current levels. Powell's press conference comments that December is "not a foregone conclusion" contributed to upward pressure on Treasury yields across the curve. The 10-year yield's move to 4.08% places it at the 63rd percentile of its 5-year range—within the middle range but trending higher as markets adjust expectations for a more gradual easing cycle.

Credit Pulse

Credit markets maintained relative stability despite the shift in Fed communication, with investment-grade spreads widening a modest 7 basis points to 78bp—remaining in the lower third of the 5-year range at the 33rd percentile. High-yield spreads were essentially unchanged, tightening 1 basis point to 270bp at the 18th percentile, suggesting continued demand for yield in a low default environment. The modest divergence between compressed spreads and rising policy uncertainty may warrant monitoring for potential repricing into year-end.

Primary market and rating migration dynamics: Corporate issuance decelerated from September's record $226 billion pace as issuers adopted a wait-and-see approach ahead of the FOMC meeting. Year-to-date issuance reached $1.736 trillion through September, up 5.9% year-over-year, with Q3 net issuance of $121 billion after accounting for maturities. The fallen angel watchlist remains manageable but warrants monitoring: Paramount Global (Baa3/negative), Warner Bros Discovery, Charter Communications, and select commercial real estate names represent $40-60 billion of potential downgrades per Barclays estimates. Boeing's successful equity raise and strike resolution removed immediate downgrade pressure, though S&P maintains a negative outlook. The October default count of 14 globally (11 US) pushed the trailing 12-month speculative-grade rate to 4.4%, with 50% taking the form of distressed exchanges rather than payment defaults—suggesting workout solutions remain available despite tighter financial conditions.

Fund flows sustain technical bid: US bond funds attracted $4.91 billion for the week ending October 29 (fourth consecutive weekly inflow), with notable rotation dynamics. Short-to-intermediate investment-grade funds led with $1.72 billion of inflows, while general taxable fixed income absorbed $1.47 billion. Significantly, short-term government/Treasury funds experienced $1.23 billion of outflows, indicating active rotation from government paper into credit. Sector performance showed meaningful dispersion: Financials outperformed on regulatory relief expectations, Energy gained 0.64% despite oil at $60.88/barrel on data center power demand themes, while Technology underperformed at -0.32% amid tariff concerns. The consumer sector shows stress with 16 defaults year-to-date, concentrated in lower-income facing businesses.

Technical Market Dynamics – Quantitative Tightening Conclusion

The Federal Reserve's scheduled conclusion of quantitative tightening on December 1, 2025 represents a significant technical shift for fixed income markets. After reducing its balance sheet by $2.2 trillion over 3.5 years—from approximately 35% of GDP to 21%—the Fed will freeze holdings at roughly $6.6 trillion and transition to reinvestment mode. The cessation of $35 billion monthly MBS runoff removes a consistent source of duration supply while redirecting principal payments into Treasury bill purchases.

Global Central Bank Divergence – Policy Paths Separate

The divergence in global monetary policy intensified during the week, with the Fed's cautious easing contrasting sharply with accommodative stances elsewhere. The European Central Bank maintained its deposit rate at 2.00% for a third consecutive meeting, citing inflation "close to target" while acknowledging trade and geopolitical uncertainties. The Bank of Japan's 7-2 vote revealed internal pressure for tightening, with dissenting members Takata and Tamura advocating for 0.75% rates. This policy divergence supported the Dollar Index at 99.72, creating favorable conditions for US fixed income despite rising yields, as currency-hedged returns remain attractive for foreign investors managing approximately $8 trillion in US debt holdings.

Federal Reserve Policy Outlook – December 2025

Chair Powell's October 29 press conference adjusted market expectations regarding the pace of potential easing. His observation that "there were strongly differing views about how to proceed in December" and that another cut is "not a foregone conclusion—far from it" shifted December rate cut probability from approximately 98% to 67% according to fed funds futures. The 10-2 FOMC vote, with dissents favoring both additional easing and no change, illustrates the range of views regarding the appropriate balance between employment support and price stability objectives given current data limitations.

The limited availability of economic data due to the government shutdown presents challenges for the December 17-18 FOMC meeting. Should data constraints persist through November, the Committee would lack standard employment reports and potentially face data quality issues in inflation metrics due to collection interruptions. Powell's acknowledgment of operating with reduced visibility reflects the practical difficulties of conducting forward-looking monetary policy with incomplete backward-looking validation. Current market pricing suggests 2-3 additional adjustments through 2026, representing a moderation from earlier expectations.

Week Ahead: Key Economic Releases and Events

Positioning Implications for Fixed Income Investors

The combination of adjusted Fed communication, ongoing data constraints, and compressed credit spreads presents considerations for duration and credit positioning into year-end. Treasury yields at mid-range percentiles suggest potential for further adjustment should December bring a policy pause, though the 30-year's position at the 82nd percentile indicates some term premium has already been incorporated. The 2s10s spread at 50 basis points remains below historical averages, potentially indicating further steepening prospects or embedded recession expectations.

Credit market positioning warrants selective approach: With IG spreads at the 33rd percentile and HY at the 18th percentile of 5-year ranges, current valuations offer limited cushion for potential volatility. Rating agencies have identified $40-60 billion of potential fallen angel candidates, which could create technical pressure should rates remain elevated for an extended period. However, continued fund inflows—$4.91 billion into US bond funds for the week—and steady foreign demand suggest technical support remains in place. The scheduled conclusion of quantitative tightening on December 1 removes a technical consideration while 2026 refinancing requirements approach, suggesting a balanced approach to credit exposure may be appropriate. Maintaining flexibility to respond to potential year-end developments while recognizing that global central bank accommodation may continue supporting risk assets appears prudent.