Markets digest a hawkish Jackson Hole speech

Key takeaways

• The treasury curve flattened sharply Friday after Fed Chair Warsh’s hawkish Jackson Hole speech warned the Fed still has work to do on inflation.
• Credit spreads tightened, with IG at 78 basis points (bps) and HY at 260 bps, as returns held positive despite late-week volatility.
• Core PCE was in line with expectations; the September FOMC meeting now looms as the key event ahead.

Market recap

The Jackson Hole Economic Symposium dominated attention as U.S. Federal Reserve (Fed) Chair Warsh delivered a hawkish Friday speech, warning that inflation is not meaningfully slowing. Markets responded by pricing in modest tightening for the September meeting. Core PCE rose 0.2% month-over-month and 3.3% year-over-year, in line with expectations, giving the Fed some near-term flexibility without softening its hawkish tone.

Treasuries rallied early before Warsh’s remarks sparked a sharp Friday selloff, flattening the curve as the front end bore the brunt; the 2-year yield posted its second-largest single-day increase this year.

Returns stayed positive despite the volatility. The Bloomberg U.S. Aggregate Bond Index returned +0.13%, investment grade corporates +0.32% and preferreds +0.33%. High yield returned +0.27% and emerging markets +0.28%, while MBS returned +0.09%.

Fixed income outlook from this week’s activity

Chair Warsh’s hawkish Jackson Hole remarks shift near-term risk toward a more restrictive stance, with markets now pricing modest tightening for September. We expect the Fed to remain on hold, viewing in-line PCE and flat real spending as consistent with a patient approach, though the hawkish rhetoric raises the risk profile heading into next month’s meeting. We forecast a range of 4.25% to 4.50% for the 10-year U.S. Treasury yield at year-end 2026.

Credit fundamentals remain broadly supportive, with spreads tightening despite the rate volatility. September brings a heavy investment grade supply calendar, though demand appears strong enough to absorb it. We favor carrying high-quality income, with spread sectors offering attractive all-in yields at elevated levels.

Weekly fixed income performance snapshot

U.S. Treasuries

The curve flattened sharply as Chair Warsh’s hawkish Friday speech drove a front-end selloff, with the 2-year posting its second-largest single-day increase this year. Treasuries had rallied modestly earlier in the week awaiting Jackson Hole. Debate continued over whether the Treasury’s buyback program can sustainably reduce long-end yields, which remain well above 10- and 20-year averages.

The 2-year yield rose 11 bps to 4.35%, the 5-year rose 6 bps to 4.48%, the 10-year fell 2 bps to 4.72%, the 20-year fell 6 bps to 5.21% and the 30-year fell 7 bps to 5.21%.

Tax-exempt municipals

Municipal bonds declined modestly as Jackson Hole rate volatility weighed on the sector. Year-to-date performance remains marginally positive. We continue to favor longer duration in municipals over Treasuries, viewing elevated absolute yields as an attractive entry point for patient investors.

The Bloomberg Municipal Index returned -0.16%.

Taxable municipals

Taxable munis posted a modest gain as the long-end rally accompanied curve flattening. Year-to-date performance remains essentially flat, though elevated yields continue to attract crossover demand.

The Bloomberg Municipal Taxable Index returned +0.18% with spreads at 52 bps.

Investment grade corporates

IG spreads tightened to 78 bps despite a late-summer lull in primary activity. Syndicate desks are bracing for a heavy September calendar, though demand appears strong enough to absorb even high-end issuance estimates. Yields above 5.4% continue to draw buyers.

The Bloomberg U.S. Corporate Bond Index returned +0.32% with spreads at 78 bps.

U.S. high yield corporates

High yield posted a positive return as spreads tightened, though CCC-rated bonds underperformed, with yields climbing to a multi-year high as investors favored quality. Summer issuance stayed minimal. Fund flows turned negative, posting the largest outflow since May.

The Bloomberg High Yield 2% Issuer Capped Index returned +0.27% with spreads at 260 bps.

Preferred securities

Preferred securities posted a positive return despite rate volatility from Warsh’s remarks, a headwind for the rate-sensitive sector. New issuance stayed light given the late-summer environment, with several redemptions announced.

The ICE Preferred Index returned +0.33% with spreads at 156 bps.

Senior loans

Loans posted a positive return, though primary activity was minimal amid the late-summer slowdown. CLO issuance stayed exceptionally active as managers rushed to price ahead of Labor Day. Fund flows remained positive, supporting the constructive technical backdrop.

The S&P Leveraged Loan Index returned +0.22% with spreads at 476 bps.

Securitized credit

Agency MBS tightened modestly as large funds boosted overweights. ABS spreads approached their tightest levels in more than four years amid strong demand and robust year-to-date issuance. CMBS spreads held steady. CLO primary activity was heavy ahead of Labor Day, with numerous deals pricing Friday alone.

The Bloomberg MBS Index returned +0.09% with spreads at 27 bps. The Bloomberg CMBS Index returned -0.13% with spreads at 65 bps. The Bloomberg ABS Index returned -0.02% with spreads at 44 bps.

Global emerging markets

EM assets sold off sharply Friday as Warsh’s hawkish speech boosted the dollar and rate-hike expectations, though earlier strength at regional bond auctions kept the week’s total return positive. Moody’s upgraded Pakistan and raised Nigeria’s outlook to positive, while Senegal was downgraded.

The Bloomberg Global EM Index returned +0.28% with spreads at 155 bps.

U.S. Treasury market yields

Fixed income investment characteristics and returns