WEEK ENDING 10/30/2026
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- The Federal Reserve, in a 10-2 decision, leaves short-term interest rates unchanged.
- The Fed’s favorite inflation indicator looks a little warmer.
- Election Day is tomorrow, Tuesday, November 3, 2026.
- Tune in to our quarterly webinar on Thursday for more details.
A CITY DIFFERENT TAKE
The Fed met last week and, in a 10-2 decision, left short-term interest rates unchanged, while the two dissenters wanted a 0.25% increase. Chair Warsh was firm in focusing on bringing inflation down to the Fed’s 2.00% target. Some observers thought his comments in the presser were rather dovish, but we do not share that opinion.
“Federal Reserve Chairman Kevin Warsh devoted just a few words to the labor market at his news conference on Oct. 28, assuring the audience that employment conditions are stable. ‘Job gains have kept pace with the workforce, and the unemployment rate has changed little, so on the employment side of the Fed’s dual mandate, conditions are quite positive,’ he said, before pivoting to a discussion of inflation.” Fed's Focus
The market’s implied probability of a 0.25% increase in the Fed Funds rate at the Dec Fed meeting is 72.8%. All other readings are sub-50% except for the March meeting, which is 55.3%
The US Personal Consumption Expenditures report was released last week. Year over year, the headline number was in line with market expectations (3.6%) and above August’s 3.4%. Core PCE Y/Y was also in line with expectations of 3.1%, and above August’s 3.0%.
The third-quarter annualized GDP report showed solid Q3 growth at 3.4% versus expectations of 3.2% and last quarter’s 2.2%.
THE TREASURY MARKET
Yields declined across the Treasury curve in the last week. The 1, 5, 10, and 30-year maturities were lower in yield by 0.08%, 0.11%, 0.06%, and 0.02%, respectively. The Treasury yield, as measured by the 2-10-year spread, steepened a bit to 0.38% versus last week’s 0.31%. Investors pulled $5 (B) from taxable fixed income mutual funds in the week ending 10/21/2026. Taxable fixed income ETFs saw +$5.8 (B) of cash flow for the same period. Source: Investment Company Institute. This was most likely driven by tax-loss selling and cheap beta replacement. Relative to inflation, real yields (yield minus the inflation measure) are more attractive in shorter Treasury maturities than in longer maturities.
Quality spreads: the extra income an investor is promised for buying lower-credit-quality securities is narrow. AAA-BBB is 0.98% as of 10/31/2026; the long-term average is 1.54% as of 10/31/2026, or 0.67 standard deviations below that average. Looking at the high-yield category, the spread is 3.28% compared to an average of 4.51%, or 0.54 standard deviations below the long-term average.
THE MUNICIPAL MARKET
The municipal market outperformed the Treasury market for another week. Treasury yields in 1, 5, 10, and 30-year maturities were lower for the week by 0.08%, 0.11%, 0.06%, and 0.02%. The yield change for those maturities in the municipal market was -0.10%, -0.12%, -0.12%, and -0.05%, respectively. On a ratio basis relative to the Treasury market, AAA general obligation municipal bond yields are barely equal to the after-tax breakeven ratio and are well below their long-term averages as CDI calculates them. Relative to inflation, real yields (yield minus the inflation measure) are more attractive in shorter municipal maturities than in longer maturities.
Municipal bond funds saw investors pull $4.3 (B) out of them for the week ending 10/21/2026. In contrast, municipal bond ETFs saw positive cash flow of $3.7 (B) for the same period Source: Investment Company Institute. The main driver of this seems to be tax-loss harvesting, as investors sold mutual funds at a loss and established new positions in ETFs. The 2-10 spread for AAA general obligation bonds was unchanged at 0.63%. This spread is historically narrow based on the CDI calculation. It is currently -1.13 standard deviations below the long-term average. Quality spreads have barely moved; the AAA-BBB spread in ten years is 0.87% versus last week’s 0.85%.
THE CORPORATE MARKET
Corporate bond yields moved lower on the week. Investment-grade corporate yields were lower by 0.01% to 0.15%, depending on maturity.
THIS WEEK IN WASHINGTON
Midterm elections are Tuesday, November 3, 2026. Is anyone else getting sick of shameless political ads on TV and all the texts hitting your phone? These are interesting times; I read somewhere that it is a curse to live in interesting times. Anyway, the real volatility will probably take place after we see the administration’s reaction to the election results.
CONCLUSION
The big questions facing the economy and the fixed income markets, as CDI sees it, are:
- Inflation’s path and the Fed’s reaction function.
- AI bubble or not, it seems like we have seen a couple of “flight to quality” days in the markets based on AI bubble fears; this Barron’s headline sums it up:
“Half of ‘Big Money’ Managers Say the AI Boom Has Years Left to Run The optimists in Barron’s fall poll cite robust earnings growth; the pessimists see a bubble in danger of bursting. Plus, the pros’ forecasts for rates, midterms, and more.” How the Pros see AI - Midterm election results and the administration’s reactions to them.
CDI continues to believe that the elevated rate enviroments will persist and that it is a buying opportunity. It will also be coupled with flight-to-quality periods.
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