Yield Curve Analysis – ARCTOSFX LLC

Yield Curve (Current)
3-mo	6-mo	1-yr	2-yr	5-yr	10-yr	30-yr	AaaAaa represents the highest rung of investment-grade corporate debt, indicating top-level creditworthiness and the lowest default risk. More	BaaBaa represent the lowest rung of investment-grade corporate debt with moderate credit risk, making them susceptible to higher default risk than Aaa bonds. More
3.86	3.95	3.98	4.17	4.36	4.68	5.25	5.92	6.37

Date	3-mth	6-mth	1-yr	2-yr	5-yr	10-yr	30-yr	AaaAaa represents the highest rung of investment-grade corporate debt, indicating top-level creditworthiness and the lowest default risk. More	BaaBaa represent the lowest rung of investment-grade corporate debt with moderate credit risk, making them susceptible to higher default risk than Aaa bonds. More	HY-OAS	5Y5Y5Y5Y forward rate provides a market-implied view of where policy ultimately settles once cyclical forces dissipate. Importantly, it captures the destination of policy rather than its near-term trajectory, and should be interpreted as a structural anchor rather than a tactical signal. More Forward	5Y Breakeven Inflation
8/14/2026	3.86	3.95	3.98	4.17	4.36	4.68	5.25	5.92	6.37	2.67	2.3	2.24
8/7/2026	3.87	3.96	4.01	4.19	4.35	4.65	5.19	5.85	6.29	2.7	2.28	2.22
7/31/2026	3.83	3.98	4.08	4.28	4.45	4.75	5.27	5.96	6.38	2.84	2.3	2.26
7/24/2026	3.96	4.08	4.14	4.33	4.43	4.69	5.16	5.87	6.28	2.79	2.28	2.24
7/17/2026	3.85	3.96	4.01	4.18	4.28	4.55	5.06	5.72	6.14	2.73	2.21	2.27
7/10/2026	3.85	3.99	4.06	4.21	4.30	4.56	5.06	5.72	6.14	2.69	2.2	2.28
7/3/2026	3.82	3.98	3.96	4.14	4.23	4.49	4.98	5.6	6.02	2.74	2.22	2.24
6/26/2026	3.83	3.94	3.94	4.07	4.12	4.38	4.87	5.5	5.94	2.83	2.19	2.21
6/19/2026	3.83	3.92	4.00	4.19	4.23	4.46	4.90	5.5	5.97	2.66	2.23	2.27
6/12/2026	3.78	3.82	3.86	4.09	4.21	4.48	4.97	5.52	6.01	2.71	2.23	2.39
6/5/2026	3.78	3.81	3.88	4.17	4.29	4.55	5.01	5.53	6.06	2.76	2.24	2.48
5/29/2026	3.69	3.78	3.79	3.98	4.13	4.45	4.99	5.5	6.02	2.72	2.24	2.52
5/22/2026	3.68	3.79	3.86	4.13	4.27	4.56	5.07	5.61	6.13	2.74	2.26	2.54
5/15/2026	3.69	3.77	3.82	4.09	4.26	4.59	5.12	5.65	6.21	2.80	2.28	2.7
5/8/2026	3.69	3.74	3.75	3.90	4.02	4.38	4.95	5.47	6.03	2.81	2.28	2.62
5/1/2026	3.68	3.71	3.73	3.88	4.02	4.39	4.97	5.49	6.08	2.77	2.27	2.69
4/24/2026	3.69	3.71	3.67	3.78	3.92	4.31	4.91	5.41	6.01	2.86	2.23	2.61
4/17/2026	3.70	3.69	3.64	3.71	3.84	4.26	4.88	5.36	5.98	2.83	2.16	2.56
4/10/2026	3.69	3.72	3.70	3.81	3.94	4.31	4.91	5.42	6.03	2.94	2.14	2.58
4/3/2026	3.71	3.73	3.72	3.84	3.99	4.35	4.91	5.44	6.05	3.13	2.11	2.61
3/27/2026	3.73	3.75	3.77	3.88	4.06	4.44	4.98	5.66	6.22	3.42	2.06	2.56
3/20/2026	3.74	3.79	3.80	3.88	4.01	4.39	4.96	5.61	6.18	3.24	2.13	2.63
3/13/2026	3.72	3.70	3.66	3.73	3.87	4.28	4.90	5.60	6.11	3.28	2.11	2.61
3/6/2026	3.71	3.68	3.56	3.53	3.67	4.10	4.73	5.32	5.86	3.13	2.14	2.56
2/27/2026	3.68	3.61	3.48	3.42	3.58	4.02	4.64	5.25	5.77	3.10	2.1	2.40
2/20/2026	3.69	3.60	3.51	3.46	3.65	4.08	4.72	5.25	5.76	2.86	2.13	2.43
2/13/2026	3.68	3.59	3.42	3.40	3.61	4.04	4.69	5.31	5.81	2.95	2.12	2.42
2/6/2026	3.68	3.59	3.45	3.54	3.80	4.26	4.85	5.40	5.90	2.87	2.18	2.50
1/30/2026	3.67	3.61	3.48	3.54	3.81	4.24	4.87	5.35	5.86	2.80	2.19	2.53

Source: Federal Reserve Economic Data (FRED) is an online database created and maintained by the Research Department at the Federal Reserve Bank of St. Louis

RATE PRESSURE REBUILDING | FRONT-END EXPECTATIONS EASING | LONG-END TERM PREMIUM RISING

Treasury markets produced a modest bearish repricing this week, but the internal dynamics were considerably more nuanced than a simple rise in yields across the curve. Front-end yields declined modestly, while the 5Y–30Y sector moved higher, with the 30-year Treasury leading the selloff. This produced renewed curve steepening even as September Fed expectations became materially less hawkish.

At the same time, credit conditions remained broadly supportive and Treasury volatility declined further. Inflation expectations, however, moved modestly higher. The combination suggests that the long-end selloff was driven less by renewed near-term policy tightening and more by higher long-durationBond Duration: Estimates the percentage change in a bond’s price for every 1% shift in interest rates. For example, a bond with a 3-year duration will gain or lose roughly ±3% of its value if rates fall or rise by 1%. More compensation, modestly firmer inflation expectations, and a reassessment of the longer-run rate structure.

Macro Structure: Modest Bear Steepening with Divergent Front-End and Long-End Dynamics

- - - Front end:
      - 3M → 3.86% (↓ -1bp)
      - 6M → 3.95% (↓ -1bp)
      - 1Y → 3.98% (↓ -3bp)

→ The policy-sensitive front end continued to decline, albeit modestly. The 1-year yield fell 3bp, suggesting that markets became somewhat less concerned about near-term policy restraint. This is consistent with the significant increase in the probability of no change at the September FOMC meeting.

- - - Belly:
      - 2Y → 4.17% (↓ -2bp)
      - 5Y → 4.36% (↑ +1bp)

→ The belly was essentially mixed, with the 2-year yield edging lower while the 5-year yield moved slightly higher. The divergence reinforces the idea that this week’s repricing was not primarily about the immediate Fed policy outlook.

- - - Long end:
      - 10Y → 4.68% (↑ +3bp)
      - 30Y → 5.25% (↑ +6bp)

→ The long end led the selloff, particularly the 30-year sector. The increase in long-term yields despite lower front-end yields points toward higher term premiumThe "extra" return investors demand for holding a long-term bond instead of a series of short-term ones. It acts as a safety buffer, compensating the lender for the increased risk that inflation or interest rates might change unexpectedly over a longer period. More and/or higher long-run real-rate expectations rather than a straightforward repricing of near-term Fed policy.

Curve & Inflation Signals

The Treasury curve steepened further this week.

- - - 10Y–3M spread: +82bp(↑ +4bp)
    - 30Y–2Y spread: +108bp(↑ +8bp)

→ Both major curve measures widened. The 10Y–3M spread increased as the 3-month yield declined while the 10-year yield rose. More importantly, the 30Y–2Y spread widened by 8bp, reflecting significant underperformance by the long end relative to the policy-sensitive 2-year sector.

This represents a bear-steepeningA bear steepener occurs when long-term rates rise faster than short-term rates and is generally associated with rising inflationary expectations. More configuration, but with an important qualification: the front end actually rallied modestly. The steepening was therefore generated primarily by long-end weakness rather than a renewed surge in short-term policy expectations.

- - - 5Y5Y5Y5Y forward rate provides a market-implied view of where policy ultimately settles once cyclical forces dissipate. Importantly, it captures the destination of policy rather than its near-term trajectory, and should be interpreted as a structural anchor rather than a tactical signal. More Forward: 2.30% (↑ +2bp)
    - 5Y Breakeven Inflation: 2.24% (↑ +2bp)

→ Inflation expectations firmed modestly, but the magnitude remains limited. The simultaneous increase in the 5Y5Y5Y5Y forward rate provides a market-implied view of where policy ultimately settles once cyclical forces dissipate. Importantly, it captures the destination of policy rather than its near-term trajectory, and should be interpreted as a structural anchor rather than a tactical signal. More Forward and breakeven rate provides some support for an inflation component in the long-end selloff, although the move is not large enough to characterize this as a material inflation repricing.

The more important signal remains the relative performance of the long end: nominal yields rose while the front end declined, suggesting that term premiumThe "extra" return investors demand for holding a long-term bond instead of a series of short-term ones. It acts as a safety buffer, compensating the lender for the increased risk that inflation or interest rates might change unexpectedly over a longer period. More and longer-run real-rate considerations remain important drivers of curve dynamics.

Fed Policy Expectations

Fed Funds Futures produced a mixed but generally less hawkish near-term signal, with an important exception in the October contract.

- - - September: The probability of no change increased sharply from 41.1% to 58.4%, while the probability of a +25bp hike fell from 44.5% to 27.5%. Markets also introduced a 14.2% probability of a -25bp cut. This represents a meaningful shift toward a September hold and away from immediate tightening.
    - October: Pricing changed dramatically. The probability of cumulative +50bp tightening increased from 50% to 100%. This is either an unusually large repricing representing the most aggressive policy signal in the current futures curve or there is a data-error in the fed-fund futures contracts.
    - December: Expectations remained concentrated around +25bp. The probability of +25bp declined modestly from 77.8% to 75.3%, while the probability of no change increased to 14.3%.
    - January 2027: Markets now assign a 92.6% probability of cumulative +25bp tightening, up sharply from 62.2% previously, while the probability of +50bp fell to 3.6%.
    - March–June 2027: Markets continue to anticipate additional tightening, although the probability distribution has shifted toward smaller cumulative increases relative to the previous week.

→ The policy signal is therefore not uniformly hawkish or dovish. September became materially less restrictive, while the later meetings continue to price substantial cumulative tightening. The extreme October shift toward a 100% probability of +50bp stands out and should be interpreted carefully rather than treated as evidence of a smooth, continuous policy path.

The Treasury curve is broadly consistent with this mixed signal: front-end yields declined as immediate policy risk eased, while longer-term yields increased as investors reassessed the longer-run rate structure.

Credit Markets

Corporate credit remained broadly resilient, although the improvement was less uniform than last week.

- - - AaaAaa represents the highest rung of investment-grade corporate debt, indicating top-level creditworthiness and the lowest default risk. More: 5.92% (↑ +7bp)
    - BaaBaa represent the lowest rung of investment-grade corporate debt with moderate credit risk, making them susceptible to higher default risk than Aaa bonds. More: 6.37% (↑ +8bp)
    - Baa–AaaAaa represents the highest rung of investment-grade corporate debt, indicating top-level creditworthiness and the lowest default risk. More spread: +45bp(↑ +1bp)
    - HY OAS: 2.67% (↓ -3bp)

→ High-yield credit spreadsIn the bond market, it is the difference in yield between a corporate bond and a "risk-free" government bond of the same maturity. It represents the extra interest investors demand to compensate for the risk that a company might default. More tightened modestly despite higher long-term Treasury yields, providing continued evidence that investors are not treating the increase in long-term rates as a sign of deteriorating corporate fundamentals.

The slight widening in the Baa–AaaAaa represents the highest rung of investment-grade corporate debt, indicating top-level creditworthiness and the lowest default risk. More spread, however, reinforces the need for nuance: credit conditions remain broadly supportive, but the improvement is not completely uniform across the credit spectrum.

MOVE Index

The ICE Bank of America U.S. Bond Market Option Volatility Estimate (MOVE) Index measures implied volatility of U.S. Treasury yields, derived from options on Treasuries (primarily 2Y–30Y maturities). It’s commonly called the “VIX for bonds”, but more precisely, it reflects the market’s expectation of how much Treasury yields will move, not bond prices. It is a critical cross-asset signal.

Bond VIX
Date	bp
1/3/2020	60.12
1/10/2020	53.32
1/17/2020	49.67
1/24/2020	59.94
1/31/2020	72.98
2/7/2020	65.59
2/14/2020	62.38
2/21/2020	74.54
2/28/2020	109.67
3/6/2020	125.21
3/13/2020	138.4
3/20/2020	133.37
3/27/2020	88.33
4/3/2020	65.01
4/10/2020	74.39
4/17/2020	69.84
4/24/2020	66.09
5/1/2020	48.11
5/8/2020	57.4
5/15/2020	56.53
5/22/2020	51.67
5/29/2020	51.55
6/5/2020	61.97
6/12/2020	55.81
6/19/2020	53.45
6/26/2020	51.21
7/3/2020	50.96
7/10/2020	49.19
7/17/2020	45.68
7/24/2020	42.48
7/31/2020	41.98
8/7/2020	41.46
8/14/2020	43.09
8/21/2020	45.14
8/28/2020	48.19
9/4/2020	47.04
9/11/2020	43.12
9/18/2020	37.24
9/25/2020	36.97
10/2/2020	39.97
10/9/2020	57.52
10/16/2020	57.25
10/23/2020	58.46
10/30/2020	61.91
11/6/2020	39.88
11/13/2020	42.95
11/20/2020	42.31
11/27/2020	39.64
12/4/2020	43.89
12/11/2020	47.52
12/18/2020	44.64
12/25/2020	42.11
1/1/2021	48.98
1/8/2021	44.81
1/15/2021	45.14
1/22/2021	43.09
1/29/2021	47.41
2/5/2021	47.2
2/12/2021	47.01
2/19/2021	60.43
2/26/2021	75.66
3/5/2021	69.37
3/12/2021	70.83
3/19/2021	68.8
3/26/2021	61.49
4/2/2021	63.71
4/9/2021	61.21
4/16/2021	62.57
4/23/2021	59.98
4/30/2021	58.13
5/7/2021	54.13
5/14/2021	54.99
5/21/2021	54.59
5/28/2021	52.04
6/4/2021	49.78
6/11/2021	50.85
6/18/2021	60.45
6/25/2021	55.58
7/2/2021	52.41
7/9/2021	59.92
7/16/2021	58.24
7/23/2021	65.28
7/30/2021	61.19
8/6/2021	62.64
8/13/2021	55.45
8/20/2021	59.95
8/27/2021	57.98
9/3/2021	53.26
9/10/2021	51.73
9/17/2021	56.06
9/24/2021	58.46
10/1/2021	57.38
10/8/2021	59.65
10/15/2021	62.7
10/22/2021	72.04
10/29/2021	75.45
11/5/2021	66.9
11/12/2021	78.61
11/19/2021	73.39
11/26/2021	89.45
12/3/2021	79.14
12/10/2021	74.36
12/17/2021	72.46
12/24/2021	77.29
12/31/2021	77.1
1/7/2022	74.69
1/14/2022	76.59
1/21/2022	81.03
1/28/2022	85.29
2/4/2022	87.68
2/11/2022	94.03
2/18/2022	94.36
2/25/2022	93.34
3/4/2022	131.82
3/11/2022	99.03
3/18/2022	91.77
3/25/2022	125.27
4/1/2022	108.34
4/8/2022	124.86
4/15/2022	119.66
4/22/2022	128.12
4/29/2022	128.4
5/6/2022	121.42
5/13/2022	114.61
5/20/2022	111.1
5/27/2022	98.48
6/3/2022	97.73
6/10/2022	114.23
6/17/2022	133.75
6/24/2022	127
7/1/2022	144.17
7/8/2022	145.25
7/15/2022	129.85
7/22/2022	123.7
7/29/2022	116.36
8/5/2022	122.58
8/12/2022	106.28
8/19/2022	123.81
8/26/2022	122.95
9/2/2022	120.72
9/9/2022	121.54
9/16/2022	124.95
9/23/2022	137.28
9/30/2022	141.89
10/7/2022	148.46
10/14/2022	152.89
10/21/2022	156.95
10/28/2022	144.6
11/4/2022	128.44
11/11/2022	111.69
11/18/2022	129.33
11/25/2022	129.6
12/2/2022	118.62
12/9/2022	132.79
12/16/2022	113.65
12/23/2022	113.17
12/30/2022	121.61
1/6/2023	113.87
1/13/2023	113.55
1/20/2023	114.76
1/27/2023	100.7
2/3/2023	98.99
2/10/2023	109.63
2/17/2023	110.11
2/24/2023	122.84
3/3/2023	122.52
3/10/2023	140.06
3/17/2023	180.11
3/24/2023	173.66
3/31/2023	135.93
4/7/2023	139.2
4/14/2023	118.84
4/21/2023	120.84
4/28/2023	122.46
5/5/2023	130.21
5/12/2023	120.52
5/19/2023	127.51
5/26/2023	145.37
6/2/2023	120.95
6/9/2023	115.77
6/16/2023	104.43
6/23/2023	105.74
6/30/2023	110.64
7/7/2023	130.41
7/14/2023	112.48
7/21/2023	106.66
7/28/2023	109.76
8/4/2023	115.91
8/11/2023	112.13
8/18/2023	120.51
8/25/2023	110.37
9/1/2023	102.92
9/8/2023	104.34
9/15/2023	96.61
9/22/2023	101.11
9/29/2023	113.55
10/6/2023	126.64
10/13/2023	128.33
10/20/2023	135.45
10/27/2023	129.16
11/3/2023	118.74
11/10/2023	116.79
11/17/2023	113.11
11/24/2023	107.43
12/1/2023	111.51
12/8/2023	121.65
12/15/2023	115.75
12/22/2023	111.38
12/29/2023	114.62
1/5/2024	116.19
1/12/2024	106.51
1/19/2024	104.97
1/26/2024	100.23
2/2/2024	106.72
2/9/2024	106.21
2/16/2024	109.2
2/23/2024	108.31
3/1/2024	106.48
3/8/2024	100.88
3/15/2024	97.82
3/22/2024	91.04
3/29/2024	86.38
4/5/2024	94.31
4/12/2024	112.82
4/19/2024	111.26
4/26/2024	104.4
5/3/2024	95.96
5/10/2024	94.23
5/17/2024	89.35
5/24/2024	83.57
5/31/2024	91.14
6/7/2024	91.82
6/14/2024	100.16
6/21/2024	94.09
6/28/2024	98.59
7/5/2024	98.78
7/12/2024	86.79
7/19/2024	94.29
7/26/2024	97.76
8/2/2024	112.26
8/9/2024	108.26
8/16/2024	102.81
8/23/2024	105.63
8/30/2024	107.77
9/6/2024	107.24
9/13/2024	100.6
9/20/2024	91
9/27/2024	92.53
10/4/2024	100.15
10/11/2024	118.47
10/18/2024	123.13
10/25/2024	128.4
11/1/2024	132.58
11/8/2024	99.85
11/15/2024	102.47
11/22/2024	99.14
11/29/2024	95.22
12/6/2024	83.2
12/13/2024	85.66
12/20/2024	91.75
12/27/2024	94.8
1/3/2025	93.35
1/10/2025	96.57
1/17/2025	95.6
1/24/2025	86.75
1/31/2025	91.76
2/7/2025	93.13
2/14/2025	84.67
2/21/2025	91.83
2/28/2025	104.46
3/7/2025	104.41
3/14/2025	101.01
3/21/2025	94.54
3/28/2025	96.83
4/4/2025	125.71
4/11/2025	137.26
4/18/2025	114.64
4/25/2025	105.79
5/2/2025	101.4
5/9/2025	100.4
5/16/2025	96.7
5/23/2025	100.91
5/30/2025	92.11
6/6/2025	89.65
6/13/2025	95.31
6/20/2025	90.1
6/27/2025	87.93
7/4/2025	86.09
7/11/2025	85.48
7/18/2025	83.29
7/25/2025	82.09
8/1/2025	83.83
8/8/2025	79.2
8/15/2025	76.66
8/22/2025	78.1
8/29/2025	79.39
9/5/2025	85.29
9/12/2025	73.37
9/19/2025	72.51
9/26/2025	74.38
10/3/2025	69.53
10/10/2025	81.65
10/17/2025	78.62
10/24/2025	68.94
10/31/2025	66.61
11/7/2025	74.41
11/14/2025	79.71
11/21/2025	78.81
11/28/2025	68.95
12/5/2025	67.28
12/12/2025	69.25
12/19/2025	59.41
12/26/2025	58.5
1/2/2026	62.36
1/9/2026	61.55
1/16/2026	58.05
1/23/2026	56.25
1/30/2026	59.2
2/6/2026	63.62
2/13/2026	70.1
2/20/2026	64.27
2/27/2026	73.38
3/6/2026	81.26
3/13/2026	91.17
3/20/2026	108.84
3/27/2026	111.95
4/3/2026	81.78
4/10/2026	72.15
4/17/2026	65.7
4./24/2026	66.97
5/1/2026	70.41
5/8/2026	67.25
5/15/2026	79.87
5/22/2026	78.43
5/29/2026	70.22
6/5/2026	75.2
6/12/2026	69.36
6/19/2026	65.39
6/26/2026	66.79
7/3/2026	65.4
7/10/2026	69.55
7/17/2026	70.88
7/24/2026	76.82
7/31/2026	83.02
8/7/2026	72.03
8/14/2026	69.58

- - - Current reading: 69.58(↓ -2.45)
    - Leading Indicator: Rate volatility often transmits into equity volatility because discount ratesThe interest rate used to determine what a future sum of money is worth today. It accounts for the "time value of money"—the principle that a dollar today is worth more than a dollar tomorrow—and the risk that a future payment might not actually be received. More underpin asset valuations.
    - Trend: Continued decline from 83.02 two weeks ago and 72.03 last week.
    - Interpretation: Treasury volatility continued to fall, reaching its lowest level of the recent three-week period. This indicates that investors are becoming more comfortable with the rate environment even as the long end reprices modestly higher. The combination of higher long-term yields and falling MOVE is notable. It suggests that this week’s rise in yields was not accompanied by a broad increase in uncertainty or disorderly bond-market selling.
    - Expected 10yr ranges (by timeframe):

Timeframe	Low (%)	High (%)
1 week	4.58	4.78
1 month	4.48	4.88
1 year	3.98	5.38

Impact on Equities

- - - Equity Valuation Pressure: The increase in long-term Treasury yields represents a renewed valuation headwind for equities, although the broader market environment remains mixed rather than uniformly negative.

Most Discounted-Cash-Flow (DCF) models use the 10-yr as the “risk-free” rate. So, as the rises, the present value (PV) of future cash flows declines.

Normal Equity Risk Premium (ERP): the extra return investors expect for choosing stocks over “safe” Treasuries. While earnings yields provide a baseline for expected returns, the sustainability of those returns depends heavily on the composition of nominal growth.

The “quality” of the 2025 Nominal GDP was low, as the latest release of 2025 Real GDP ^(BEA) was only 0.48%, while inflation ^{(GDP Price Deflator)} was around 3.74%. This puts Nominal GDP (2025) at 4.24%. In other words, ~88.2% of the increase in the dollar value of the economy (Nominal GDP) in 2025 was due to higher prices. If this trend continues, then the threat of stagflationAn economic anomaly characterized by the simultaneous occurrence of stagnant growth and high unemployment alongside persistent, rising inflationary pressure. More rises. With real growth subdued and inflation doing most of the work, the quality of earnings expansion becomes a key risk for equity valuations.

- - - Fixed income yields remain increasingly competitive relative to equity earnings yields
      - Treasuries: 3.86% – 5.25%
        
        IG Credit: 5.92% – 6.37%

→ The 10-year Treasury yield above the 4.50% valuation threshold represents an important line in the sand for equity discount ratesThe interest rate used to determine what a future sum of money is worth today. It accounts for the "time value of money"—the principle that a dollar today is worth more than a dollar tomorrow—and the risk that a future payment might not actually be received. More. At 4.68%, the absolute level of risk-free yields remains high enough to constrain equity multiples, particularly for longer-duration growth stocks.

The 30-year yield’s rise to 5.25% reinforces the broader durationBond Duration: Estimates the percentage change in a bond’s price for every 1% shift in interest rates. For example, a bond with a 3-year duration will gain or lose roughly ±3% of its value if rates fall or rise by 1%. More headwind. However, the impact is partially offset by tighter HY OAS and declining MOVE, which indicate that credit risk and interest-rate volatility remain contained.

→ Bottom line: Equity conditions became somewhat less favorable from a valuation perspective this week because long-term yields moved higher and remain above the 4.50% threshold. However, the absence of widening high-yield spreads or rising rate volatility suggests that the move does not currently represent a broad deterioration in risk appetite.

Risk Appetite

Risk appetite remained generally constructive but not unequivocally risk-on.

The most supportive signals are the continued tightening in HY OAS and the further decline in the MOVE Index. Together, they indicate that investors remain comfortable with credit risk and that Treasury-market volatility is becoming less problematic.

However, long-term Treasury yields moved higher and the Baa–AaaAaa represents the highest rung of investment-grade corporate debt, indicating top-level creditworthiness and the lowest default risk. More spread widened modestly. These offsetting signals argue against describing the week’s move as a broad improvement in financial conditions.

→ Overall, risk appetite remains resilient, but the signal is better characterized as stable-to-constructive rather than decisively risk-on. Investors appear comfortable absorbing somewhat higher long-term rates without demanding significantly greater compensation for credit risk.

Growth vs. Inflation Narrative

This week’s data suggest that markets are reassessing the longer-run rate structure rather than making a major change to the broader economic outlook.

Front-end Treasury yields declined as September policy expectations became substantially less hawkish, while long-term yields moved higher. At the same time, both the 5Y5Y5Y5Y forward rate provides a market-implied view of where policy ultimately settles once cyclical forces dissipate. Importantly, it captures the destination of policy rather than its near-term trajectory, and should be interpreted as a structural anchor rather than a tactical signal. More Forward and 5-year breakeven increased modestly. This combination suggests that the long-end repricing may reflect a mixture of higher expected real rates, modestly firmer inflation expectations, and term premiumThe "extra" return investors demand for holding a long-term bond instead of a series of short-term ones. It acts as a safety buffer, compensating the lender for the increased risk that inflation or interest rates might change unexpectedly over a longer period. More, rather than a simple change in near-term Fed policy expectations.

Credit markets provide little evidence of an acute deterioration in growth expectations. HY OAS tightened and MOVE continued to decline, indicating that investors remain relatively comfortable with both credit and rate risk.

However, the rise in long-term yields keeps financial conditions from becoming unambiguously easier. With the 10-year Treasury at 4.68%, the absolute level of borrowing and discount ratesThe interest rate used to determine what a future sum of money is worth today. It accounts for the "time value of money"—the principle that a dollar today is worth more than a dollar tomorrow—and the risk that a future payment might not actually be received. More remains elevated.

→ The most defensible interpretation is that markets continue to expect resilient economic conditions while reassessing the longer-run level of interest rates. Inflation expectations remain contained, credit markets remain supportive, and rate volatility is declining, but the rise in long-term yields means the adjustment is not uniformly benign for financial conditions.

Curve Narrative

The Treasury curve experienced a modest bear-steepeningA bear steepener occurs when long-term rates rise faster than short-term rates and is generally associated with rising inflationary expectations. More repricing, but the internal dynamics are important: the steepening occurred primarily because the long end sold off while the front end continued to rally modestly.

The 3-month through 2-year sector declined between 1bp and 3bp, while the 5-year through 30-year sector increased between 1bp and 6bp. The 30-year Treasury was the weakest major maturity, rising 6bp to 5.25%. As a result, the 10Y–3M spread widened 4bp to 82bp, while the 30Y–2Y spread widened 8bp to 108bp.

This is therefore a genuine bear-steepeningA bear steepener occurs when long-term rates rise faster than short-term rates and is generally associated with rising inflationary expectations. More configuration, but it differs materially from a conventional policy-driven bear steepenerA bear steepener occurs when long-term rates rise faster than short-term rates and is generally associated with rising inflationary expectations. More. The front end did not sell off. Instead, September Fed expectations became significantly less hawkish, with the probability of no change rising to 58.4%. The long end consequently appears to be responding to factors beyond immediate Fed policy expectations.

Inflation measures provide some additional context. The 5Y5Y5Y5Y forward rate provides a market-implied view of where policy ultimately settles once cyclical forces dissipate. Importantly, it captures the destination of policy rather than its near-term trajectory, and should be interpreted as a structural anchor rather than a tactical signal. More Forward and 5-year breakeven both increased 2bp, indicating a modest firming in inflation expectations. However, the magnitude remains relatively small and does not point to a major inflation shock. The stronger explanation is therefore a combination of higher long-run real-rate expectations and term premiumThe "extra" return investors demand for holding a long-term bond instead of a series of short-term ones. It acts as a safety buffer, compensating the lender for the increased risk that inflation or interest rates might change unexpectedly over a longer period. More, with a modest inflation component.

The divergence between the front and long ends is particularly important. Markets appear less concerned about aggressive near-term tightening, but they are not necessarily concluding that the long-run equilibrium interest rate will fall correspondingly. This creates a curve structure in which near-term policy risk is easing while long-durationBond Duration: Estimates the percentage change in a bond’s price for every 1% shift in interest rates. For example, a bond with a 3-year duration will gain or lose roughly ±3% of its value if rates fall or rise by 1%. More compensation remains elevated.

→ Overall, the curve continues to signal a resilient economic environment rather than an imminent recessionary repricing, but the message is not simply “lower rates are coming.” Instead, the market is increasingly distinguishing between near-term Fed policy and the longer-run level of interest rates. The positively sloped curve, resilient credit markets, and declining MOVE provide little evidence of acute recession stress, while the elevated 10-year and 30-year yields demonstrate that long-durationBond Duration: Estimates the percentage change in a bond’s price for every 1% shift in interest rates. For example, a bond with a 3-year duration will gain or lose roughly ±3% of its value if rates fall or rise by 1%. More financial conditions remain restrictive.

Bottom Line

This week’s market action was characterized by a modest bearish repricing at the long end despite a continued easing in front-end policy expectations. The result was further curve steepening, while credit markets and Treasury volatility remained broadly supportive.

Key Themes:

- - - Modest bear steepeningA bear steepener occurs when long-term rates rise faster than short-term rates and is generally associated with rising inflationary expectations. More, driven primarily by long-end weakness rather than front-end selling.
    - 10Y–3M widened to 82bp and 30Y–2Y widened to 108bp.
    - September Fed expectations became materially less hawkish, with 58.4% probability of no change.
    - Longer-dated policy expectations remain substantially tighter, creating a more complex policy path.
    - 5Y5Y5Y5Y forward rate provides a market-implied view of where policy ultimately settles once cyclical forces dissipate. Importantly, it captures the destination of policy rather than its near-term trajectory, and should be interpreted as a structural anchor rather than a tactical signal. More Forward and 5Y breakeven both increased 2bp, but inflation expectations remain broadly contained.
    - HY OAS tightened 3bp, while Baa–AaaAaa represents the highest rung of investment-grade corporate debt, indicating top-level creditworthiness and the lowest default risk. More widened modestly.
    - MOVE declined to 69.58, indicating continued normalization in Treasury volatility.
    - The 10-year Treasury remains above the 4.50% equity valuation threshold, keeping a meaningful discount-rate headwind in place.

→ Overall, the week’s data point toward stable-to-constructive financial conditions with renewed pressure concentrated in long-durationBond Duration: Estimates the percentage change in a bond’s price for every 1% shift in interest rates. For example, a bond with a 3-year duration will gain or lose roughly ±3% of its value if rates fall or rise by 1%. More rates. Markets appear less concerned about aggressive near-term Fed tightening, but the continued rise in long-term yields indicates that lower short-term policy expectations are not translating into an equivalent decline in the longer-run cost of capital. The combination of a positively sloped curve, resilient credit markets, contained inflation expectations, and falling rate volatility remains inconsistent with an acute recessionary repricing, but the elevated level of long-term yields continues to impose a meaningful constraint on valuations and broader financial conditions.

Yield Curve Summary

Metric	(bp)	Comment
2yr - 3mo	+31	Terminal rateThe ultimate peak or trough interest rate targeted by a central bank before halting a monetary policy cycle, marking the point where policy is deemed sufficiently restrictive to curb inflation or accommodative to spur growth. More might have been reached.
10yr - 3mo	+82	Long-term inflation persistence worries replacing recessionary risk worries.
10yr - 2yr	+51	Fairly robust signal of economic "normalization"
AaaAaa represents the highest rung of investment-grade corporate debt, indicating top-level creditworthiness and the lowest default risk. More - 10yr	+124	healthy, standard spread for top-tier credit, indicating no signs of stress in the plumbing of the financial system.
HY-OAS	+267	credit markets are not pricing in meaningful default risk or recession stress
MOVE Index	+69.58	Rate volatility is relatively calm
5Y5Y Forward Rate5Y5Y forward rate provides a market-implied view of where policy ultimately settles once cyclical forces dissipate. Importantly, it captures the destination of policy rather than its near-term trajectory, and should be interpreted as a structural anchor rather than a tactical signal. More	2.30%	Fed policy remains restrictive relative to its longer-run equilibrium.
5Y Breakeven Inflation Rate	2.24%	Inflation expectations remain somewhat above target