Recent data continues to highlight a K-shaped economic pattern in the U.S., with higher-income households sustaining spending while lower-income households face growing strain. Chair Powell acknowledged these divergences in the Fed’s most recent press conference, noting that monetary policy — designed as a broad tool to restrain overall demand — inevitably affects borrowers unevenly. Lower-income earners, who are more likely to carry floating-rate or short-maturity debt, disproportionately absorb the impact of restrictive rate policies. As a result, demand compression has been concentrated in households already operating with limited financial flexibility, further widening the lower arm of the “K.”
Last week’s ADP report showed 42,000 private-sector jobs added in October — above consensus and the strongest print since July, but well below the gains typical of 2023–2024. The headline masks underlying fragility: the increase follows two months of declines and underscores the bifurcation within the labor market. High-income households continue to drive nearly half of all U.S. consumer spending, while lower-income families pull back amid tight budgets, elevated living costs, and continued layoffs across select industries. The concentration of economic momentum among the top 10–20% of earners raises sensitivity to asset-market volatility. With the top 20% now accounting for almost two-thirds of total U.S. consumption (a new high) any sustained downturn in equity markets could undermine the last remaining pillar of cyclical strength. Meanwhile, the bottom 80%, which accounted for roughly 42% of spending pre-pandemic, has seen its share fall to just 37%, heightening the risk that further demand softening cascades through the broader economy.
The pending Supreme Court ruling on the administration’s use of IEEPA to justify reciprocal tariffs has injected another layer of policy uncertainty into markets. Polymarket currently assigns only a 25% probability to a ruling in favor of President Trump, and commentary from several conservative justices this week suggested skepticism toward the administration’s legal argument. While the Court remains unpredictable, markets increasingly expect the IEEPA-based tariff structure to be struck down as early as December. From a tactical asset-allocation perspective, we see room for a rebound in sectors that have been disproportionately discounted as “tariff losers” — notably consumer discretionary, healthcare, and industrials — given the possibility of a near-term reset to the current tariff framework.
Even if the reciprocal tariffs are overturned, the administration retains multiple legal avenues to restore or reconfigure the tariff regime, including Section 338 of the Tariff Act of 1930 (explicitly raised by Justice Alito), as well as Sections 301, 232, and 122. However, these options vary in speed, scope, and vulnerability to further legal challenge. A reconstituted tariff policy could take time to assemble — particularly if documentation requirements under Section 301 constrain rapid deployment — creating a window of elevated uncertainty for cross-border supply chains. Meanwhile, the government may ultimately be required to refund a portion of the IEEPA tariff revenue collected this year, which could total $130–140 billion by year-end. While such a refund would likely prove fiscally transient if alternative tariffs are implemented, the operational complexity and delay could influence corporate behavior and reinforce onshoring incentives as firms seek to de-risk exposure.
CHANGES IN RATES
Treasury Market
Treasury rates declined over the week. The 2/10-year slope ended the week at 53 basis points.
Municipal Market
Yields in the municipal market stayed almost same. The 2/10 slope ended the week at 25 basis points.
U.S. states and local governments have once again aggressively tapped the municipal market. Issuance surpassed $500 billion in 2025, marking the second consecutive year of record supply. The flood of long-dated paper has weighed on total returns, particularly at the long end, where munis have lagged both Treasuries and corporates.
Looking ahead, issuance tailwinds remain strong. Analysts expect the supply in 2026 could reach $600 billion, supported by resilient economic conditions, ongoing infrastructure needs, and relatively stable rate expectations. Elevated supply may continue to challenge performance at the long end, but can create attractive entry points for investors seeking incremental tax-exempt spread and structural diversification.
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
Treasury-muni ratios were slightly higher across the yield curve.
Investment Grade Corporates
Investment grade corporate bond yields moved higher week over week for the longer tenors.
We have entered the longest government shutdown — 41 days as of this writing. Over the weekend, the Senate convened for a session, and in a bipartisan breakthrough, it advanced funding measures with the support of eight Democrats. Meanwhile, critical agency operations and benefit programs remain under strain.
The United States Department of Agriculture (USDA) and states are in court over the suspension or reduction of Supplemental Nutrition Assistance Program (SNAP) benefits.
The Federal Aviation Administration (FAA) has reduced flight volume in certain high-traffic markets because of air traffic controllers working without pay.
A report from the Congressional Budget Office (CBO) estimated that the shutdown could cost the U.S. economy between $7 billion and $14 billion, depending on its duration, potentially reducing Q4 GDP by up to 2%.
Since many federal employees are either furloughed or working without pay (impacting more than 900,000 according to some estimates), the consumer side of the economy is under additional pressure.
The shutdown remains an uncomfortably high-risk backdrop for U.S. macro and credit markets. There is a possible end in sight, but with political brinkmanship continuing, the possibility of broader economic spill-over (to consumption, aviation/travel, public-sector contractors) is elevated. From a fixed-income perspective, the unresolved funding gap adds risk premiums to U.S. Treasuries, agency debt, and downstream sectors reliant on federal funding or contractor pay. Investors should watch for any “deal talk” turning into concrete legislation — and equally any breakdown in those talks, which could trigger a step-down in risk sentiment.
The 5-year Breakeven Inflation Rate finished the week of Nov. 3 at 2.20%, 20 basis points lower than the previous week. The 10-year Breakeven Inflation Rate finished the period at 2.28%, 2 basis points lower than last week's observation. The government shutdown prevents us from updating the above graph.
Last week's 10-year quality credit spread between BBB revenue and AAA general obligation bonds was at 0.82% versus a historical average of 1.68%, demonstrating very healthy and tight spread metrics.
Investment grade spreads are tight at 1.01%, 6 basis points higher than last week. This is still very tight compared to a historical average of 1.57%. The high-yield spread is lower at 2.85%, compared to a historical average of 4.57%. We believe that both these markets are overpriced on a spread basis.
Money Market Flows (millions of dollars)
Money market fund flows were up in total last week, led by the government category.
Mutual Fund Flows (millions of dollars)
Mutual fund flows were a net positive compared to the prior week, except in municipal, which dropped to a net negative.
ETF Fund Flows (millions of dollars)
ETFs were mixed over the week.
This is a holiday week with a projected $8.2 billion in municipal supply.
The federal shutdown has entered a prolonged and unprecedented phase, now stretching into its 41st day (as of this writing) and officially becoming the longest in U.S. history. Despite a possible deal emerging from the Senate, the economic consequences are mounting: pressure on federal operations, reductions in critical services, and a projected drag of up to $14 billion on economic output if the impasse persists. With the wealthiest segment of households still driving consumption while lower-income families absorb much of the strain, the shutdown amplifies existing vulnerabilities across the K-shaped economy.
For capital market participants, the message is straightforward: policy risk remains elevated, visibility is compressed, and the macro backdrop is increasingly fragile. Until Congress delivers a credible funding solution, markets will continue to price in uncertainty across Treasuries, agencies, and sectors tied to federal spending. The longer political brinkmanship continues, the greater the potential for broader economic spillover and a sharper deterioration in risk sentiment.
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