Why yields fell
- The Fed said additional hikes might wait. The odds of a hike in October dropped to 26% from 70% a week ago.
- Tumult in Europe added demand for US Treasuries, which pushed yields lower. European bonds are being sold off because rising energy prices are fueling inflation and higher interest-rate expectations, while concerns over government debt and borrowing are pushing investors to demand higher yields.
The US economy is still accelerating
- Manufacturing data for September came in at a four-month high, even though inflation from fuel and tariffs remains a problem.
- Weekly jobless claims were steady, and job cuts in September were the lowest since 2022, according to Challenger, Gray & Christmas.
Credit is getting more selective
The bond market is becoming much more skeptical of leveraged and speculative borrowers. Investors are trimming exposure to the companies that depend most on cheap capital.
- Credit spreads increased. When risk-free rates rise, corporate borrowing costs go up automatically. If credit spreads widen at the same time, weaker companies get hit from both sides.
- High-yield spreads of around 3.1 percentage points are still tight compared with the 4.6 percentage points seen during the Liberation Day tariff shock in April 2025. The level is still comfortable. The direction is dangerous.
That is the number to watch.