The week to Friday, 16 October 2026

The credit leg of the reading has reversed. Where the earlier judgement held that "credit spreads tightened"¹, this week they widened: investment grade was out 1bp² to 0.84³% and high yield out 12bp⁴ to 3.23⁵%.

The duration call still stands, but on price action rather than on domestic macro: the ten-year fell 14bp⁶ to 5.10⁷% and the real ten-year fell 13bp⁸. Consumer prices rose 3.7%⁹ on the year, which is not a disinflation. Long duration is a position I hold with less conviction than a week ago, and further spread widening would end it.

The regime model keeps the portfolio stance intact, but the support it gives is narrower than it looks. The hidden Markov state for August, available at the start of September, is Goldilocks, unchanged from the previous run, and the model puts the bulk of its weight on that state persisting at the next monthly step. The sign rule applied to the two gaps reads Contraction instead, because the price factor sits well below its own twenty-year average while the growth factor is barely above its.

That price reading is a statement about a broad factor against its own history, not about current inflation, which has been running hot elsewhere in this piece. I would hold duration on the growth evidence rather than on the price evidence.

Nothing in this week's Federal Reserve communication changes the rate outlook behind a long-duration position. The Vice Chair for Supervision's remarks were devoted entirely to supervisory modernization, not to the policy stance: the stated agenda was "three related aspects of supervisory modernization"¹⁰, built around the independent review of the Silicon Valley Bank failure.

The substance is regulatory. The review's preliminary findings "substantiate difficult but important critiques regarding Federal Reserve System supervision failures to act in a timely manner"¹¹, and the diagnosis points at internal decision rights rather than at the rules themselves, with tailoring framed as "directing supervisory attention to the risks that are most material"¹².

A supervisory regime that prioritises material risk earlier is marginally supportive for bank credit spreads and neutral for duration. Treat this as neither confirmation nor challenge to the benign macro regime, and leave rate-sensitive positioning unchanged.

Stay long duration, but the case rests on the long end rather than on anything the front end is telling us. The thirty-year fell 17bp¹³ on the week to 5.43%¹⁴ and the ten-year fell 14bp⁶ to 5.10%⁷, while the two-year was close to unchanged at 4.77%¹⁵, leaving the ten-year to two-year spread at 0.35¹⁶ percentage points after a narrowing of 9bp¹⁷. The ten-year real yield fell 13bp⁸ to 2.78%¹⁸ with breakevens up 2bp¹⁹ to 2.35%²⁰, so the move was real rates, not inflation pricing. That is the cleanest evidence for duration, and it is worth noting it comes from the market rather than from the domestic activity data, which argue the other way. Over four weeks the ten-year is still +0.09²¹ percentage points. Policy was unchanged at 4.00%²².

Stay in high-quality credit, but the case does not extend down the rating scale. Investment grade spreads are close to unchanged, at 0.84%³ after a move of +0.01² percentage points on the week and +0.07²³ percentage points over four weeks, still well below the fifty-two week high of 0.94%²⁴. The investment grade total return index rose 0.8%²⁵ on the week, carried by lower long yields.

High yield is the exception. Spreads widened 0.12⁴ percentage points on the week and 0.55²⁶ percentage points over four weeks, to 3.23%⁵, and the high yield total return index fell 0.1%²⁷ despite the rally in duration. That divergence is a genuine qualification to the benign reading elsewhere, and it argues against adding risk in the lowest-quality parts of the market.

The US equity pullback is shallow enough to hold positions but not to add to them. The S&P index fell 1.9%²⁸ on the week to 7,659.44²⁹, and the Nasdaq Composite fell 2.4%³⁰ to 26,713.03³¹. Both remain higher over four weeks, the S&P index up 8.94³² points and the Nasdaq up 190.48³³ points, and both sit well above their twelve-month lows of 6,343.72³⁴ and 20,794.64³⁵. With credit spreads widening at the same time, the equity decline is not yet evidence enough to buy the dip.

Energy is the one place where the benign price picture is strained, though not yet enough to change positioning. Brent fell 3.48³⁶ dollars per barrel on the week to 126.55³⁷, while WTI rose 3.18³⁸ dollars to 101.91³⁹; over four weeks Brent gained 6.89⁴⁰ dollars. The dollar is firm, with the broad index at 121.60⁴¹ and up 2.09⁴² points over four weeks. A firmer dollar limits the pass-through from crude into domestic prices, so the soft inflation reading still holds.

The growth side of the benign case holds, and the softness sits in labour and household demand rather than in prices. The Atlanta Fed nowcast is 3.64%⁴³, its highest in a year 3.64%⁴⁴, but payrolls added only 29⁴⁵ thousand on the month, unemployment is 4.20%⁴⁶ against a one-year low of 4.10%⁴⁷, and sentiment sits at 51.7⁴⁸, nearer its one-year low of 44.8⁴⁹ than its high. Prices are the qualifier: consumer prices rose 3.7%⁹ on the year and core PCE 3.0%⁵⁰. Slack in jobs and spending, not inflation, is what supports duration here.

UK duration is the exception to the long-yield rally, and we would not add here. The ten-year gilt eased 2bp⁵¹ on the week to 5.38%⁵², but is up 13bp⁵³ over four weeks; the twenty-year at 5.72%⁵⁴ is up 15bp⁵⁵. Bank Rate was unchanged at 3.75%⁵⁶. Growth of +0.4%⁵⁷ on the quarter and unemployment at 4.90%⁵⁸ keep cuts distant.

The benign regime holds elsewhere, but gilts price a domestic supply and inflation problem that the rest of the world does not share.

Stay long euro area duration. The ten-year fell 12bp⁵⁹ on the week to 3.39%⁶⁰ and the two-year fell 5bp⁶¹ to 2.99%⁶², with the deposit rate unchanged at 2.50%⁶³ and growth of +0.6%⁶⁴ on the quarter. Two things narrow the case: consumer prices rose 3.8%⁶⁵ on the year, and high yield spreads widened 12bp⁶⁶ to 3.36%⁶⁷, near the 3.37%⁶⁸ annual high. Keep credit exposure in the highest quality tier.

Trim Japanese equity: the Nikkei fell 5.4%⁶⁹ on the week to 65,324.29⁷⁰, well below its 72,366.34⁷¹ high of the past year. Duration held up. The ten-year fell 8bp⁷² to 2.95%⁷³ and the thirty-year fell 6bp⁷⁴, while the two-year was unchanged, a flatter curve. Growth of +0.4%⁷⁵ on the quarter and unemployment at 2.50%⁷⁶ keep the backdrop benign.

Canada fits the benign regime. The ten-year fell 3bp⁷⁷ on the week to 3.83%⁷⁸ and is down 4bp⁷⁹ over four weeks, while the two-year was +0.02⁸⁰ percentage points at 3.20%⁸¹. The Bank of Canada held at 2.25%⁸². Growth ran +0.8%⁸³ on the quarter and +1.1%⁸⁴ on the year, with unemployment at 6.40%⁸⁵, matching its low of the past year. Duration here stays attractive.

EM credit is the one place the benign reading thins, and only at the margin. Sovereign spreads widened 4bp⁸⁶ on the week and 25bp⁸⁷ over four weeks to 1.59%⁸⁸; high yield widened 58bp⁸⁹ over four weeks to 3.39%⁹⁰. Both sit below their yearly highs of 1.82%⁹¹ and 3.94%⁹². This is position trimming, not a growth signal, and does not change the case for holding quality credit.

The main risk to a benign rate outlook this week is political rather than cyclical. The President directed that a committee be formed, "to investigate allegations that Federal Reserve Governor Lisa D. Cook made false statements"⁹³, with a White House hearing and a recommendation on removal to follow. A contested Board seat raises the chance of a term premium shock that the growth and inflation data alone would not justify. Separately, the Administration restated an energy agenda aimed at "strengthening our Nation’s energy independence"⁹⁴, which is disinflationary at the margin. Neither item changes our preference for duration and high-quality credit.