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
3.87	3.96	4.01	4.19	4.35	4.65	5.19	5.85	6.29

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
8/7/2026	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

POLICY EXPECTATIONS EASING | RATE VOLATILITY FALLING | GROWTH OUTLOOK STABLE

Treasury yields declined across nearly the entire curve this week as markets continued to moderate expectations for aggressive Fed tightening. The move was led by the belly, with 2Y–10Y yields falling roughly 9–10bp, while the 3M rate edged higher. At the same time, 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, the MOVE Index fell sharply, and long-run inflation expectations remained contained. Taken together, the week’s price action points toward easing rate pressure and improving financial conditions rather than a deterioration in the growth outlook.

Macro Structure: Broad Bullish Repricing with Modest Bull-Flattening Characteristics

- - - Front end:
      - 3M → 3.87% (↑ +4bp)
      - 6M → 3.96% (↓ -2bp)
      - 1Y → 4.01% (↓ -7bp)

→ The front end was mixed, with the 3-month yield rising modestly while 6-month and 1-year yields declined. The broader move nevertheless reflects reduced expectations for aggressive policy tightening, particularly further out the policy-sensitive front end.

- - - Belly:
      - 2Y → 4.19% (↓ -9bp)
      - 5Y → 4.35% (↓ -10bp)

→ The belly led the rally. The decline in intermediate yields indicates that markets are increasingly pricing a less restrictive expected policy path over the coming years.

- - - Long end:
      - 10Y → 4.65% (↓ -10bp)
      - 30Y → 5.19% (↓ -8bp)

→ Long-term yields also declined materially, although slightly less than the 5Y. The move appears consistent with lower real-rate pressure rather than a major change in long-run inflation expectations.

Curve & Inflation Signals

The curve became flatter at the front while the very long end steepened modestly.

- - - 10Y–3M spread: +78bp(↓ -14bp)
    - 30Y–2Y spread: +100bp(↑ +16bp)

→ The sharp narrowing of the 10Y–3M spread reflects the 3-month yield’s rise relative to the substantial decline in 10-year yields. Meanwhile, the essentially unchanged 30Y–2Y spread indicates that the intermediate and long ends moved broadly together.

- - - 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: 2.28% (↓ -2bp)
    - 5Y Breakeven Inflation: 2.22% (↓ -4bp)

→ Inflation expectations remain well anchored and actually softened modestly this week. With both forward inflation and breakevens declining alongside nominal yields, the Treasury rally appears to have been driven primarily by lower real-rate expectations and reduced policy risk, rather than a renewed inflation premium.

Fed Policy Expectations

Fed Funds Futures became modestly less hawkish at the September and December meetings, while maintaining a substantial probability of additional tightening further into 2027.

- - - September: The probability of no change increased from 30.8% to 41.1%, while the probability of +25bp declined from 54.7% to 44.5%. The +50bp probability was essentially unchanged at 14.4%. Markets therefore moved toward a greater probability of a September hold.
    - October: Pricing was unchanged, with markets still assigning a 50% probability of cumulative +50bp tightening.
    - December: Expectations shifted meaningfully toward a +25bp outcome. The probability of +25bp increased from 62.2% to 77.8%, while +50bp fell from 24.2% to 12.7%.
    - 2027: The policy path also became somewhat less aggressive. The probability of +50bp declined at January, March, April, and June meetings, with corresponding increases in +25bp or, where applicable, less restrictive outcomes.

→ Overall, Fed Funds Futures confirm a gradual moderation in the expected tightening cycle. This aligns closely with the decline in 2Y–5Y Treasury yields and helps explain this week’s bullish repricing across the curve.

Credit Markets

Corporate 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 widened modestly alongside higher Treasury yields.

- - - AaaAaa represents the highest rung of investment-grade corporate debt, indicating top-level creditworthiness and the lowest default risk. More: 5.85% (↓ -11bp)
    - 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: 6.29% (↓ -9bp)
    - Baa–AaaAaa represents the highest rung of investment-grade corporate debt, indicating top-level creditworthiness and the lowest default risk. More spread: +44bp(↑ +2bp)
    - HY OAS: 2.70% (↓ -14bp)

→ The significant narrowing in HY OAS is particularly important. Despite a modest widening in the investment-grade quality spread, high-yield credit became substantially more supportive, suggesting investors remain comfortable with corporate fundamentals and risk-taking.

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

- - - Current reading: 72.03(↓ -10.99)
    - 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: Sharp decline from last week’s elevated 83.02 reading.
    - Interpretation: Treasury volatility fell substantially as markets gained greater confidence in the near-term policy outlook. The improvement in HY-OAS and the MOVE Index provides a more constructive signal for risk assets. Tighter 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 indicate continued confidence in corporate fundamentals, while the sharp decline in Treasury volatility reduces uncertainty around the discount-rate environment. Nevertheless, until the 10-year yield moves sustainably below 4.50%, elevated risk-free rates remain a structural constraint on equity multiples, particularly for longer-duration growth stocks.
    - Expected 10yr ranges (by timeframe):

Timeframe	Low (%)	High (%)
1 week	4.55	4.75
1 month	4.44	4.86
1 year	3.93	5.37

Impact on Equities

- - - Equity Valuation Pressure: The decline in longer-term Treasury yields provided some relief to equity valuations this week, but the absolute level of rates remains a meaningful headwind. Higher long-term yields further tighten financial conditions, weighing most heavily on longer-duration growth stocks and sectors where valuations are more sensitive to changes in interest rates.

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: 3.87% – 5.19%
        
        IG Credit: 5.85% – 6.29%

→ Equity conditions improved this week, but the improvement is incremental rather than transformational. Lower yields, tighter 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, and falling rate volatility are supportive, yet the 10-year Treasury remains above the 4.50% valuation threshold, keeping discount-rate pressure firmly in place.

Risk Appetite

Risk appetite improved at the margin, although the underlying signal is not uniformly risk-on.

The strongest evidence comes from the 14bp decline in HY OAS and the sharp 11-point drop in the MOVE Index. Together, these indicate that investors became more comfortable with both credit risk and interest-rate volatility. Lower Treasury yields also reduced some of the immediate pressure on risk assets.

However, the improvement should not be overstated. The Baa–AaaAaa represents the highest rung of investment-grade corporate debt, indicating top-level creditworthiness and the lowest default risk. More spread widened from 42bp to 44bp, indicating that investment-grade credit did not experience the same broad-based improvement as high-yield markets. In addition, the 10-year Treasury remains elevated at 4.65%, meaning the absolute level of risk-free rates continues to constrain financial conditions and equity valuations.

→ Overall, risk appetite improved, but the evidence points to reduced market stress rather than a decisive shift toward risk-on positioning. The combination of tighter HY spreads and lower rate volatility is constructive, while elevated Treasury yields and a still-uncertain policy path argue for a more measured interpretation.

Growth vs. Inflation Narrative

This week’s market action is more consistent with a moderation in policy and real-rate pressure than with a definitive change in the underlying growth outlook.

Treasury yields declined across most of the curve, with the largest moves concentrated in the 2Y–10Y sector. At the same time, Fed Funds Futures shifted toward a less aggressive near-term tightening path, particularly for September and December. This provides a coherent explanation for the decline in intermediate yields.

Inflation signals were also benign. 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 declined 2bp to 2.28%, while the 5-year breakeven fell 4bp to 2.22%. The fact that nominal yields declined alongside inflation expectations suggests that the rally was driven more by lower expected real rates and reduced policy uncertainty than by a renewed inflation premium.

The growth signal, however, is less definitive. Credit markets remain broadly resilient and HY OAS tightened materially, which argues against an acute deterioration in economic expectations. But the Treasury curve remains highly responsive to changing policy expectations, and the continued positive slope should not by itself be interpreted as proof of resilient growth.

→ The more defensible interpretation is that markets are pricing somewhat less restrictive monetary policy without simultaneously pricing a major deterioration in economic conditions. That is constructive, but it falls short of a clear “soft-landing” signal. The key question remains whether lower yields reflect an orderly normalization of real rates or the beginning of a broader reassessment of economic momentum.

Curve Narrative

The Treasury curve experienced a broad bullish repricing with modest bull-flatteningA bull flattener is a yield curve shift where long-term bond yields fall faster than short-term yields, flattening the curve. It is "bullish" for bond prices—particularly long-duration bonds—and often signals investor fear of an economic slowdown, acting as a "flight to safety". More characteristics, although the internal geometry remains nuanced.

The most important feature was the 9–10bp decline across the 2Y–10Y sector, while the 3-month yield actually increased. This caused the 10Y–3M spread to narrow sharply from 92bp to 78bp. The move therefore represents a flattening of the front-to-long-end structure, driven primarily by a stronger rally in intermediate and 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 Treasuries.

By contrast, the 30Y–2Y spread was essentially unchanged at 100bp. This indicates that the long end and belly moved relatively cohesively, with the 30-year yield declining only slightly less than the 2-year yield.

The underlying driver appears to be reduced policy risk and lower expected real rates rather than a deterioration in long-run inflation expectations. Fed Funds Futures shifted toward a more gradual tightening path, particularly for the September and December meetings, while 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 declined.

→ Overall, the curve is suggesting a moderation from the aggressive higher-for-longer repricing seen earlier in the summer toward a less restrictive policy trajectory accompanied by lower real-rate pressure. Importantly, the curve remains strongly positive, while improving credit conditions and falling rate volatility provide little evidence that markets are currently pricing an imminent recession.

Bottom Line

This week marked a meaningful improvement in the Treasury and broader fixed-income environment. Yields declined across most maturities, Fed expectations became less hawkish, HY 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 materially, and Treasury volatility fell sharply.

Key Themes

- - - Broad bullish Treasury repricing, led by the belly.
    - 10Y–3M curve flattened as long-term yields fell while the 3M yield increased.
    - Fed Funds Futures shifted toward a more gradual tightening path.
    - Long-run inflation expectations remained firmly anchored and edged lower.
    - HY OAS tightened 14bp, providing a meaningful improvement in risk appetite.
    - MOVE fell nearly 11 points, indicating a substantial reduction in rate volatility.

Overall, the week’s data point toward a more benign rates environment and some improvement in financial conditions. Markets are moving away from the most aggressive near-term tightening expectations that dominated earlier in the summer, while the positively sloped Treasury curve, resilient credit markets, and contained inflation expectations provide little evidence that markets are currently pricing an imminent recessionary repricing. The combination is consistent with a stable-to-resilient growth outlook, but does not yet constitute a definitive soft-landing signal.

Yield Curve Summary

Metric	(bp)	Comment
2yr - 3mo	+32	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	+78	Long-term inflation persistence worries replacing recessionary risk worries.
10yr - 2yr	+46	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	+120	healthy, standard spread for top-tier credit, indicating no signs of stress in the plumbing of the financial system.
HY-OAS	+270	credit markets are not pricing in meaningful default risk or recession stress
MOVE Index	+72.03	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	2.28%	Fed policy remains restrictive relative to its longer-run equilibrium.
5Y Breakeven Inflation Rate	2.22%	Inflation expectations remain somewhat above target