Last week, Treasury yields pulled back from multi-year highs, raising the possibility of a cyclical peak, even as elevated crude oil prices continue to feed inflation readings. Bank earnings were mixed, with some firms beating expectations while others fell short. Corporate bond spreads—the extra yield investors demand over Treasuries—remain historically tight despite higher interest rates. Semiconductor stocks sold off amid dual worries over the financing costs of the AI buildout and competition from China. The sell-off is creating oversold conditions, while still-robust demand for chips indicates there may be a short-term bottom. Federal Reserve (Fed) Chair Kevin Warsh, speaking in Bangkok, Thailand, declined to preview the next rate decision but reiterated the Fed’s commitment to price stability. He also repeated his bullish views on artificial intelligence (AI).
Fed Chair Warsh: The Fed “Will Deliver Price Stability”
Last Friday morning, Fed Chair Warsh spoke at the IMF-World Bank Annual Meetings in Bangkok. In his remarks, he reiterated the Fed’s commitment to price stability and praised “a synchronous tightening in monetary policy in most places around the world” as a common fight against inflation. He marveled at global economic resilience in the face of geopolitical shocks and tighter monetary policy, and he pointed to “structural growth, an investment surge” (broader than just AI) providing tailwinds and durability in the U.S. He referred to AI as “probably the most consequential change to the U.S. and the global economy in my lifetime.”
A Cyclical Peak In Treasury Yields May Have Formed
- We believe that a cyclical peak may have formed in Treasury yields. Although we believe we have entered a period of secularly rising inflation, yields can still decline on an intermediate-term basis.
- The AI sell-off triggered a flight to safety, and September payrolls came in below expectations, lending credence to concerns about economic growth rather than a pure focus on inflation.
- Despite higher inflation data, Treasury yields fell. This is a positive sign and may indicate growing confidence that the Fed will create price stability. The 10-year Treasury yield has rolled over, with initial support near 4.8% and 4.7%. If yields continue to ease, this should allow equities to have their year-end seasonal rally.
- The 10-year yield faces several risks that could push it higher later this year and into next year. First, energy prices put continued pressure on inflation. Second, bond vigilantes could reemerge, selling Treasuries and driving yields higher amid concerns about funding the U.S. deficit and another debt ceiling debate next year. Lastly, there are concerns about the amount of bond supply coming not only from the U.S. government but also from technology companies issuing sizable amounts of debt to fund the AI buildout. Near term, however, heading into the mid-term elections, interest rates look positioned to fall.
- The 2-year Treasury yield is more anchored to Fed policy. The Fed looks to be on hold for October, but the market is pricing in a higher fed funds rate in December and into early next year. There is strong resistance on the 2-year near 5.0%, which we expect will hold. Near term, the yield could fall to 4.2%, but the risk remains that it moves higher again if expectations for additional Fed tightening increase.
Oil Prices Are Putting Pressure On Inflation
According to the Bureau of Labor Statistics (BLS), oil-related energy prices (gasoline, diesel, etc.) were the dominant driver of the September monthly gains in both the Consumer Price Index (CPI) (3.7%) and the Producer Price Index (PPI) (6.3%). In CPI, oil prices accounted for more than half the headline increase; for PPI, BLS said that over 80% of the increase was attributable to higher oil prices which are quite high.
Pace Of AI Debt Issuance Expected To Ease
- Hyperscaler AI firms have issued $220 billion in debt year-to-date, according to Bloomberg. Estimates of a wider net of AI-related borrowing, including loans and convertible bonds from a broader set of industries—including data centers, semiconductors and equipment, and utilities—range from $500 billion to $1.9 trillion by year-end. The AI debt deluge has become large enough to crowd out other issuers. However, the pace of borrowing may have begun to slow.
- Investors focused on credit risk are driving yields higher on some bonds. But this is company-specific: Oracle (ORCL) and CoreWeave (CRWV) have come under greater scrutiny in the bond market, while debt issued by Microsoft (MSFT) and Apple (AAPL) is considered much more secure.
- At this time, we see no signs of systemic stress in the fixed income markets, although isolated credit issues could emerge.
AI Debt & Industry Developments in the News
- Private Equity Wire: ‘AI debt issuance slows as investors reassess financing risks’ (Oct 12, 2026)
- Bloomberg: ‘CoreWeave’s Big Dream Crashes Into Reality as Yields Top 15%’ (Oct 14-15, 2026)
- WSJ: ‘AI Runs Into Its Next Big Obstacle: Insurance’ (Oct 15, 2026)
Bank Earnings & Credit Spreads
- Bank Earnings Were Mixed: Bank earnings were mixed last week, but bank stocks have become oversold after correcting as interest rates rose. Valuations have also become attractive based on price-to-book ratios. Banks don’t tend to peak until price-to-book reaches 2.0x–3.0x. At today’s 1.5x level, bank stocks remain attractive.
- Spreads Remain Tight: Even as yields have risen, spreads—the extra yield investors demand for lending to a company rather than the U.S. government—have remained near historic lows. Tight spreads reflect a combination of strong demand, resilient investment-grade borrower fundamentals, a supply mix dominated by high-quality issuers, and geopolitical risk being absorbed by rates rather than credit—that is, markets see rising rates as a macroeconomic issue, not a reason to distrust corporate borrowers.
Magnificent 7 & Semiconductors
- Magnificent 7 Resumes Market Leadership: The Magnificent 7 continue to benefit from sustained AI and cloud demand, strong company-specific growth and innovation, and investor preference for large, high-quality growth stocks. They recently hit all-time highs, showing they are the leaders of the secular bull market.
- Semiconductors May Be Near A Bottom: Semiconductors have been correcting and remain in a trading range that began last May. During the latest pullback, the stochastic price momentum indicator has moved into oversold territory, while prices have entered a support zone. Valuations remain attractive—and even cheap relative to the broader market—at a price/earnings ratio of 14x 2027 earnings. Based on recent earnings and corporate commentary, demand for chips remains strong. Taiwan Semiconductor (TSMC) reported record profit and revenue (net profit of NT$763.1 billion, up 68.7% YoY), driven by robust AI-related demand, and raised its full-year outlook. Memory demand also remains strong amid supply shortages and rising prices.
Sector Readings & Market Breadth
Energy, Information Technology, and Healthcare led the market once more last week. They have held these positions for the past three weeks, and Energy and Information Technology have ranked either first or second for eight consecutive weeks. The Utilities sector has been the market laggard 11 weeks in a row; last week it was followed by Consumer Discretionary, then Real Estate. Energy and Healthcare were overbought, while Industrials, Real Estate, and Utilities were oversold.
Big Tech Earnings & Economic Outlook
This week the Fed goes quiet while earnings could make some noise. Earnings and economic data will drive the market, led by major reports from Meta (META) and Tesla (TSLA) on Wednesday. Investors will be watching Meta closely for commentary on AI capital spending and the adoption of Muse, its new AI agent, which appears to be a key element of the company’s turnaround. Airline earnings will also be in focus, particularly comments on jet fuel costs and consumers’ willingness to pay higher ticket prices. Procter & Gamble (PG), a Consumer Staples bellwether, reports Thursday, providing another window into consumer spending.
The economic calendar is also busy. On Tuesday, the Census Bureau will report Housing Starts and Building Permits, while the National Association of Realtors will report Pending Home Sales. On Friday, S&P Global will release its U.S. Manufacturing and Services PMIs, followed by the University of Michigan Consumer Sentiment Index.
Meanwhile, the FOMC blackout period began Saturday ahead of its October 27-28 meeting, leaving investors without any new guidance from Fed officials this week. No rate hike is expected at the meeting, with Bloomberg putting the probability of the Fed holding rates steady at 85%.
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