Where the crack shows first. HY/IG OAS, rate vol, refinancing.
The Curve Steepened 8.2 Basis Points. Credit Had Already Unwound 22.
The 2s10s slope went from 29.3 to 37.5 basis points in one session, the largest one-day steepening in this sample and tied with 28 September. The front end did the work: the 2yr fell 3.0 basis points to 4.67%, while the 10yr rose 5.2 to 5.045% and the 30yr rose 7.0 to 5.37%. Over the three sessions before it, high-yield OAS tightened 22.0 basis points to 3.18% (as of 27 October) and investment-grade OAS tightened 1.0, to 0.88%. So 21 of the 22 basis points were excess spread. Credit & Stress fell to +0.088 from +0.296, the weakest of the five sub-indices, while the composite held NEUTRAL at +0.348 on Rates & Policy at +1.048.
Capex Rose 110%. Profit Fell 56%. That Is the Whole AI Cycle.
Tesla's third quarter put the artificial-intelligence buildout on an income statement: revenue flat at 0%, operating expenses up 39%, capital spending up 110%, operating income down 56%. Operating margin fell to 2.6%. The company covered a $4.7bn capital programme with $1.5bn of free cash flow and the rest from its own balance sheet. Unlike the hyperscalers, it has no cloud franchise paying for the build. And the same week, its chief executive floated merging the company into a rocket business - which is what a P&L looks like when it can no longer carry the story.
The CPI Said Hot. The Payrolls Said Cold.
September real hourly earnings fell 0.5% on the month and 0.7% on the year, the BLS reported on 14 October, against a 0.1% gain in nominal pay. Payrolls added 29,000. The first figure is the tax; the second is the reason it cannot be passed on as wages - and Wednesday's CPI piece named the labour market as the channel that would turn an energy shock into a price spiral.
The Spread Read, the Funds Did Not
High yield OAS is 3.03% (as of 6 Oct), 5 basis points back inside last Thursday's 3.08% (29 Sep). Over the same week the long end repriced higher and the listed credit funds drifted up, not down: HYG +0.312 and JNK +0.541. Only one of those two markets is pricing stress.
The Spread Woke Up
High yield OAS has gone from 2.68% to 3.08% in 5 sessions - the top of a 3-month range and the widest print since 7 April. Over the same stretch the 10yr was at 5.29% and equity volatility sat in the 11th percentile. One of them is repricing.
The Belly Tailed. Credit Shrugged.
The $70bn 5yr cleared at 5.033%, the highest auction yield for that maturity since June 2006, with a 3.1bp tail. Over the same week high yield OAS went from 2.76% to 2.68%. Nothing in credit has marked this.
Credit Still Has Not Blinked
The 10y is at 5.01% and high yield OAS is 2.76%. The seventh session of that divergence - and today a central bank stood down as the marginal seller of its own long end.
The Crack Is Not in Spreads Yet
Credit is calm while rates are not. That divergence is the position.