The week to Friday, 9 October 2026

The case for cutting low-quality credit risk has weakened. Last week's reading was that "credit spreads widened across emerging, European and US high yield"¹; this week European high yield narrowed 3bp² and emerging market high yield 4bp³, with high-yield total returns up 2.27⁴ points. US high yield widened 5bp⁵, so the turn is partial.

The preference for duration and quality still stands. Investment-grade spreads tightened 3bp⁶ to 0.82%⁷, the two-year yield fell 8bp⁸ and ten-year breakevens eased 3bp⁹. Only a widening that spreads from high yield into investment grade would retire that preference.

The regime read backs the growth half of the case more firmly than the inflation half. The classifier keeps the economy in the benign quadrant it occupied last period, and the probability of staying there is high enough that I treat a regime change over the next few months as unlikely. That persistence is the reason to hold duration and investment-grade credit rather than trade around them.

The inflation side deserves less weight than the classification alone implies. The model's inflation input is a statistical gap, not a confirmed turn in realised prices, and policymakers are still describing inflation as too high. I would size the disinflation leg of the position smaller than the growth leg until the price data agree.

The monetary leg is the weakest part of the disinflationary expansion case, and it narrows where duration should sit. Waller described the September decision as a move to "raise our policy rate 25 basis points to 3.75 percent to 4 percent"¹⁰, and read the latest data as showing that "the labor market is stable and inflation is too high"¹¹. He expects "additional hikes to support a timelier return of inflation to our 2 percent goal"¹². That runs against the easing in breakevens and front-end yields the market delivered this week: the front end is priced against the stated reaction function, not with it.

The lower front-end yields reflect market positioning rather than confirmed disinflation, so duration exposure is better held in the long end than at the front. Growth strength is real, while the inflation improvement is not yet confirmed by either the official data or the policy stance.

The front-end rally this week is a weak basis for duration risk, not a strong one. Two-year yields fell 8bp⁸ to 4.75%¹³, and ten-year yields fell 6bp¹⁴ to 5.22%¹⁵, but over four weeks the two-year is up 12bp¹⁶ and the ten-year up 26bp¹⁷, with the policy target up 25bp¹⁸ over the same span to 4.00%¹⁹. The weekly move is noise against a front end that has repriced higher with policy, and we would add duration in the long end rather than the short. The inflation leg is cleaner: the ten-year breakeven eased 3bp⁹ to 2.33%²⁰, near the low end of its range at 2.18%²¹, while the ten-year real yield at 2.87%²² sits close to its high of 2.95%²³. The curve was broadly unchanged, at 0.44%²⁴.

Stay long investment-grade credit: the high-grade spread tightened again this week and total return rose with it. The investment-grade index spread narrowed 3bp⁶ to 0.82%⁷, within a fifty-two week range of 0.73%²⁵ to 0.94%²⁶, and the corresponding total return index gained 0.5%²⁷ to 3,504.59²⁸.

High yield cuts the other way. The high-yield spread widened 5bp⁵ to 3.15%²⁹ on the week and is +0.50³⁰ percentage points over four weeks, with the total return index up only 0.1%³¹ and -33.03³² points over the same four weeks. The widening in the riskiest part of the market is a reason to take credit risk in high grade rather than below it, not a reason to reduce credit exposure overall.

Equity gains over the week are consistent with steady growth, and they add nothing on the inflation side. The broad large-cap index rose 1.2%³³ to 7,811.54³⁴, within reach of its fifty-two week high of 7,818.93³⁵. The Nasdaq Composite rose 0.6%³⁶ to 27,366.17³⁷, and is up 1,033.13³⁸ points over four weeks. Index levels this close to the highs leave equities priced for the expansion to continue, so the duration and credit positions carry the portfolio if it does not.

Energy backs the disinflation case this week. Brent fell $10.07³⁹ to $125.44⁴⁰ a barrel, and WTI was down $1.65⁴¹ to $96.24⁴². Over four weeks Brent is still up $7.38⁴³, so the pressure has eased rather than reversed. The dollar firmed, with the broad index up 3.17⁴⁴ points over four weeks to 121.38⁴⁵, adding to the import-price relief. Both arguments point the same way for duration.

The growth half of the case holds; the inflation half is still ahead of the data. Payrolls rose 29⁴⁶ thousand to 159,044⁴⁷ thousand, unemployment sat at 4.20%⁴⁸, above its low of 4.10%⁴⁹, and the Atlanta Fed nowcast stands at 3.59%⁵⁰, the top of its year range. Realised inflation is still above target: consumer prices rose 3.4%⁵¹ on the year and core PCE 3.0%⁵², with monthly core at 0.2%⁵³. Duration length rests on the forward path, not on the inflation already printed.

The UK cuts against the duration case. Gilt yields rose across the curve: the ten-year gained 5bp⁵⁴ on the week to 5.39%⁵⁵, a fifty-two-week high, and the twenty-year gained 7bp⁵⁶ to 5.76%⁵⁷. Bank Rate was unchanged at 3.75%⁵⁸. The Bank of England noted that markets have withstood "significant increases in sovereign bond yields"⁵⁹. We prefer gilts short of the long end.

Euro area credit remains a buy, but the disinflation part of the case is weaker here than elsewhere. High yield spreads narrowed 3bp² to 3.26%⁶⁰, near the low end of the past year. Growth held at +0.6%⁶¹ per cent on the quarter. Consumer prices rose 3.2%⁶² on the year, and front-end yields firmed 4bp⁶³ with the policy rate up 25bp⁶⁴ over four weeks. Duration risk is better taken outside the euro area.

Japan cuts against the global duration call rather than supporting it. The ten-year eased 1bp⁶⁵ to 3.09%⁶⁶ on the week, but is up 10bp⁶⁷ over four weeks, and the two-year rose 2bp⁶⁸ to 1.94%⁶⁹. Growth held at +0.4%⁷⁰ on the quarter with unemployment at 2.40%⁷¹, the yen weakened 4.10⁷² yen per dollar over four weeks, and the Nikkei gained 1.1%⁷³. Keep Japanese duration exposure small.

Canada fits the same pattern, with less to add. The policy rate sat at 2.25%⁷⁴, the two-year was -0.01⁷⁵ percentage points on the week at 3.24%⁷⁶, and the ten-year was unchanged at 3.93%⁷⁷. Growth ran at +0.8%⁷⁸ on the quarter with unemployment at 6.40%⁷⁹. Rogers said the Bank can best contribute to affordability by "keeping inflation low and stable"⁸⁰. Canadian duration is a hold rather than an add here.

Emerging market credit supports the risk-on leg of the position but with less force than developed credit. Hard-currency corporate spreads were unchanged on the week at 1.58⁸¹%, and high-yield narrowed 4bp³ to 3.34⁸²%; both are wider than four weeks ago, by 26bp⁸³ and 58bp⁸⁴. Equity volatility fell 0.85⁸⁵ points to 24.55⁸⁶. EM credit is a hold, not an add.

Policy cuts both ways for the duration position. The energy agenda reinforces the supply side of the crude decline: the administration claims it has delivered "the largest oil deal in all of human history"⁸⁷ and that domestic production is running at record levels. Against that, the White House has opened a committee of inquiry to decide whether there is "cause"⁸⁸ for the removal of a sitting Federal Reserve governor. That is the main risk to the long-duration call, since a contested Board raises the term premium even as inflation cools. I would keep the credit position and size duration a notch smaller than conviction alone implies.