The Treadmill Steepens

In sharing forward capital market views, we offer clients an analogy that the global economy is like a runner on a treadmill, and in this analogy, interest rates act like the resistance ramp that can speed up or slow down the runner’s activity levels. Further, central banks represent the economy’s personal trainer, increasing the resistance ramp’s pitch depending on how the runner performs. When the runner is traversing too quickly, central bankers raise interest rates to suppress potential inflation; when the runner slows, the personal trainer lowers interest rates in hopes the gait will accelerate.

In addition to central bankers, other bond market participants heavily influence interest rates’ forward direction. Based on Treasury, Federal Reserve (Fed) and Congressional data, foreign holders are the largest owners of U.S. Treasury bonds, with estimates ranging from 25% to 31% of total U.S. debt outstanding.^1,2 In addition to foreign holders, individual investors own 19% of outstanding U.S. debt, the Fed holds 13%, and a variety of institutional investors and other governmental entities comprise the balance.³ Some of these holders are more active in their trading activity than others.

In the current context, prices are being influenced by both shorter-term considerations around the Fed and other policymakers, and also longer-term concerns about indebtedness. Readers may be familiar with the phrase “bond vigilantes,” a moniker the venerable Ed Yardeni ascribed to the fixed-income market while he served as Prudential’s chief economist during the 1980s. Yardeni noted that “if the fiscal and monetary authorities won’t regulate the economy, the bond investors will. The economy will be run by vigilantes in the credit markets.”⁴ The confluence of more immediate and structural factors has driven bond prices lower and, by implication, the treadmill’s ramp higher. 

Capital markets are adjusting to the Federal Reserve’s new communication style, a combination of intentional opacity and uneven responses to current economic data. Investors are used to more concrete forward guidance from the Fed, and investors have grown accustomed to that forward guidance being tied to a clearer “regime” on whether the personal trainer expects to continue to increase ramp resistance (an interest-rate-tightening regime) or decrease resistance (a loosening cycle). Data points accumulated within a given regime would either reinforce or challenge the existing communicated regime, with inflationary readings like the Personal Consumption Expenditures (PCE) index or the Employment Situation report (more on that below) receiving priority on inflation and employment trends, respectively.⁵

At their last committee meeting, Fed voters unanimously increased interest rates after three years of either cutting or leaving rates unchanged, but markets are unclear about whether the Fed initiated a tightening cycle. After evaluating the twelve voting members’ public comments since the last Fed committee meeting, unanimity appears to have dissipated, most notably with a Tuesday speech by New York Federal Reserve President John C. Williams noting that, “With the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information. The accumulation of more data should provide greater clarity on the underlying trends in the economy and the associated risks to achieving our goals.”⁶

When government bonds reprice, all other asset classes follow. Movements in mortgage rates have been well documented, with the average 30-year conforming mortgage cost rising to 7.25% as of October 1.¹² However, what is happening within corporate credit has not been as well documented, and movements therein are of primary significance.  

For context, corporate credit borrowing rates remain historically low for both investment-grade and non-investment-grade companies. Using quarterly data, the historical spread, or difference in yield, between a non-investment-grade bond issue and a U.S. government 10-year note has averaged 4.9% since 1987, meaning investors have required a near 5% incentive over government bonds.¹³ Spreads peaked at over 17% during the Financial Crisis and have been as low as 2%.¹⁴

Since the end of August, non-investment-grade spreads have increased by 0.6% and currently sit at 3.1%, well below historical averages, but short-term increases of this magnitude are rare. More focused corporate credit measures that isolate speculative borrowers touched 10% spreads earlier this week, moving to what are considered distressed levels for the first time since 2023.¹⁵ While these levels remain low by historical standards, the acute move in a short time period bears watching. Further, given concentrations within certain sectors and several debt issues tied to data-center buildouts, our focus remains on how the increased cost of funds ripples. 

For context, the Bureau of Labor Statistics (BLS) published its monthly U.S. Employment Situation Report on Friday, detailing the state of the U.S. labor market. Recognizing the variance inherent in this data series, this was a decidedly weaker report than markets anticipated. The BLS noted that total payrolls and unemployment were little changed on the month, but last month’s robust report was revised lower, average hourly earnings modestly fell, and the three-month rolling average of employment also dropped.¹⁶

Perhaps emblematic of indebtedness concerns trumping near-term data points, the bond market initially responded with lower yields, with the 10-year Treasury note dropping to 5.15% immediately following the data release. However, as the day continued, yields almost touched 5.3%. Other bond proxies, including mortgage, investment-grade and non-investment-grade corporates and municipal bonds were also modestly weaker on the day. What this suggests is that even data points that could be perceived as modestly deflationary are not enough to keep bond market skeptics, if not vigilantes, satisfied that the tug-of-war between growth, inflation and indebtedness will settle soon. While we retain an optimistic perspective across diversified portfolios, bond market movements will remain the key focal point irrespective of elections, hydrocarbon movement, or the soon-to-unfold corporate earnings season.  

¹ The United States Treasury. “Major Foreign Holders of Treasury Securities.” Treasury Resource Center. https://ticdata.treasury.gov/resource-center/data-chart-center/tic/Documents/slt_table5.html. Accessed 2 October 2026.

² The United States Congress. “Foreign Holdings of Federal Debt.” Library of Congress. April 22, 2026. https://www.congress.gov/crs-product/RS22331. Accessed 2 October 2026.

³ Hill, Zach. “Who Owns US Debt? Foreign vs Domestic Holders Breakdown.” The U.S. Debt Clock. September 22, 2026. https://www.us-debt-clock.com/blog/who-owns-us-debt-breakdown. Accessed 2 October 2026.

⁴ Yardeni, Edward. “The Bond Vigilantes.” Predicting the Markets: A Professional Autobiography. March 2018. https://archive.yardeni.com/pub/excerptbv.pdf. Accessed 2 October 2026. 

⁵ Pendered, David. “What Is PCE? Explaining the Fed's Preferred Inflation Measure.” Federal Reserve Bank of Atlanta. May 20, 2026. https://www.atlantafed.org/what-we-study/inflation/2026/05/20/what-is-pce-explaining-the-feds-preferred-inflation-measure. Accessed 2 October 2026.

⁶ Williams, John C. “Unwavering Dedication.” New York Federal Reserve Speeches. September 29, 2026. https://www.newyorkfed.org/newsevents/speeches/2026/wil260929. Accessed 2 October 2026. 

⁷ Board of Governors of the Federal Reserve. “Monetary Policy: What Are Its Goals? How Does It Work?” Monetary Policy Principles and Practice. https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm. Accessed 2 October 2026.

⁸ International Monetary Fund. “IMF Datamapper.” https://www.imf.org/external/datamapper/profile/. Accessed 2 October 2026.

⁹ Ibid

¹⁰ The French Republic. “France Budget Bill 2027.” The State Budget. https://www.aft.gouv.fr/en/state-budget. Accessed 2 October 2026.

¹¹ The Congressional Budget Office. “The Budget and Economic Outlook: 2026 to 2036.” February 2026. https://www.cbo.gov/publication/62105. Accessed 2 October 2026.

¹² Northern Trust Wealth Management Research, Bloomberg. Data accessed on Terminal 2 October 2026.  

¹³ Ibid 

¹⁴ Ibid  

¹⁵ Ibid 

¹⁶ U.S. Bureau of Labor Statistics. “Employment Situation Report.” Economic News Release. October 2, 2026. https://www.bls.gov/news.release/empsit.nr0.htm. Accessed 2 October 2026.