Duration Dashboard

The government shutdown October 2025 created a substantial information gap that strengthened Treasury demand, as the absence of official employment and inflation data led institutional investors into defensive positioning. The 10-year yield's break below 4% on October 16—touching 3.967% for the first time since April—represented both a technical milestone and psychological inflection point, occurring even as the Fed prepared to cut rates for the third consecutive meeting. The catalyst came from regional banking stress when Zions Bancorporation disclosed $50 million in C&I loan losses while Western Alliance reported collateral concerns, triggering the sharpest regional bank index decline since April's tariff volatility. Strong auction demand validated institutional conviction, with the October 22 sale of $13 billion 20-year bonds clearing more than 1 basis point through the when-issued level despite multi-month yield lows, while the October 23 5-year TIPS auction cleared at 1.182% real yield with a robust 2.51 bid-to-cover ratio.

Credit Pulse

Credit markets displayed notable complacency despite mounting uncertainties, with investment-grade spreads tightening to just 71 basis points—the 9th percentile of their 5-year range and approaching the decade lows of 74bp reached October 7. High-yield compression continued, with spreads narrowing 9 basis points to 269bp (17th percentile), even as regional banking stress emerged mid-week when Zions Bancorporation disclosed $50 million in C&I loan losses. The disconnect between compressed spreads and elevated macro risks suggests stretched positioning that October's record $207 billion investment-grade issuance only amplified.

Balance Sheet & Liquidity Monitor

The Federal Reserve's quantitative tightening program approached a critical inflection point during the week, with Chair Powell's October 14 acknowledgment that the Fed "may approach that point in coming months" signaling potential policy shift. The $2.2 trillion balance sheet reduction since June 2022 has reduced system liquidity to levels where stress indicators—particularly the Standing Repo Facility's $1.5 billion September usage—echo patterns last seen before the September 2019 repo market disruption. Multiple primary dealers including JPMorgan and Bank of America expect QT cessation announcement at the October 29 meeting, recognizing that further reduction risks market functioning even as inflation remains above target.

Federal Reserve Policy Outlook – October 29 Meeting Approaches

The Federal Reserve's October 29 meeting represents a significant challenge since the inflation fight began, with markets pricing near-certainty of a 25 basis point cut to 3.75%-4.00% despite the notable absence of current economic data. Chair Powell's October 14 speech signaled growing urgency to halt quantitative tightening, noting the Fed "may approach that point in coming months" as liquidity conditions showed "signs of gradually tightening." With the balance sheet down $2.2 trillion to $6.6 trillion and repo facility usage reaching $1.5 billion in September, multiple Wall Street banks expect QT cessation announcement at the October meeting.

Internal divisions crystallized when Governor Miran advocated for a 50 basis point cut on October 16, reprising his September dissent, while Governor Waller explicitly backed 25 basis points based on "conflicting signals between solid GDP growth and softening employment." The September FOMC minutes revealed "almost all participants supported" the measured pace, though "a majority emphasized upside risks to inflation." Without fresh data to adjudicate between doves focused on labor market deterioration and hawks worried about premature easing, the Committee must rely on dated information—a challenging situation when fiscal disruption and trade uncertainty cloud the outlook. Powell's press conference will require careful navigation to maintain credibility while acknowledging the informational constraints affecting policy precision.

Week Ahead: Key Market Events

• FOMC Meeting (October 28-29): 25bp cut appears locked despite data vacuum. Markets focus on dot plot revisions, QT halt timing, and Powell's navigation of shutdown impacts on policy framework.
• Trump-Xi Summit (October 30): APEC meeting in South Korea where preliminary trade agreement reached October 26 gets finalized. Tariff reduction specifics and enforcement mechanisms critical for risk appetite.
• Government Shutdown Resolution: Senate attempting override of spending impasse before month-end. Restoration of data flow would eliminate primary uncertainty driver but reveal accumulated economic damage.
• Bank of Japan Decision (October 29-30): Expected 25bp hike to 0.75% creates cross-current for US Treasuries. Yen strength could reduce Japanese demand for US duration.
• Month-End Flows: Massive October Treasury rally (+2.5% total return pace) may trigger rebalancing sales. Pension funds likely sellers into strength given equity outperformance year-to-date.

Global Context and Fed Rate Cut October 2025 Implications

The Federal Reserve's isolation as the sole major central bank aggressively easing creates significant policy divergence with important implications for Treasury demand and dollar dynamics. While the Fed approaches its third consecutive cut, the ECB holds firm at 2.00% with President Lagarde declaring the "disinflation process is now over," the Bank of Japan prepares to hike to 0.75%, and even the Bank of England maintains its hawkish bias despite UK economic weakness. This divergence, amplified by the government shutdown's fiscal uncertainty, tests whether US exceptionalism can withstand simultaneous monetary accommodation and political dysfunction.

Energy weakness creates disinflationary pressure: The week's overlooked story centered on crude oil's continued decline, with WTI settling at $61.60 per barrel (down 8.58% year-over-year) and Brent at $65.83 (down 7.28% YoY), extending the surplus conditions persistent since early 2025. Ed Yardeni's projection that 10-year yields could reach 3.75% if oil's slide continues gained credibility as the September data showed a massive 102 million barrel increase in oil on water—the largest since COVID. The EIA's forecast for Brent at just $52/barrel in 2026 suggests sustained disinflationary pressure that complicates the Fed's reaction function. Yet 5-year breakeven inflation expectations at 2.74% remain stubbornly above the Fed's 2% target, creating a paradox where falling energy prices fail to anchor inflation expectations—potentially reflecting tariff concerns or fiscal dominance fears that transcend commodity price signals.

Trade breakthrough offers tactical relief, not strategic resolution: The October 26 preliminary consensus between US and Chinese negotiators in Kuala Lumpur, covering rare earths access, fentanyl precursors, and soybean purchases, sparked risk-on sentiment into week's end. Treasury Secretary Bessent's confirmation that threatened 100% tariffs were "effectively off the table" ahead of the Trump-Xi summit provided tactical relief to duration shorts. Yet with enforcement mechanisms undefined and structural tensions unresolved, markets recognize this represents crisis postponement rather than resolution. The combination of Fed easing, fiscal paralysis, and trade uncertainty creates conditions where traditional correlations break down—evident in credit spreads at historic tights while safe-haven Treasuries rally. October's 10-year yield break below 4% may prove temporary as November brings converging catalysts: Fed decisions, trade negotiations, and potential ratings agency reviews on US fiscal sustainability should the shutdown persist.