Bond markets reel from September’s sharp selloff

Key takeaways

• The Fed’s September hike, its first since 2023, combined with weak auctions and heavy supply to push yields to multidecade highs.
• Nearly all fixed income sectors posted losses in September; municipals and MBS fell hardest while senior loans gained.
• We expect one more Fed rate hike this year then an extended hold, a less hawkish path than markets currently expect.

Market recap

September brought a sustained bond market selloff, pushing U.S. Treasury yields to multidecade highs. The U.S. Federal Reserve raised rates 25 basis points (bps) to 3.75% to 4.00%, its first hike since 2023, in a unanimous decision. Yields continued climbing through month-end as stronger-than-expected economic data, weak auctions, heavy corporate supply and renewed European sovereign stress compounded the move. Volatile oil prices tied to Middle East tensions added to inflation anxiety and boosted expectations for further Fed hikes.

Losses were broad based across fixed income for the month of September. Floating-rate assets were the clear exception, with senior loans and CLO tranches posting modest gains as their structure insulated them from the duration selloff. Shorter-duration securitized sectors held up comparatively well, while agency MBS and municipals bore the brunt of the move given their longer duration profiles.

Fixed income outlook from this week’s activity

We expect the Fed to raise rates once more by year-end, followed by an extended hold through 2027. This path is less hawkish than current market pricing, and highly dependent on the evolution of the energy shock and its pass-through to core inflation. Incoming data on services activity and the labor market will also be key factors determining the outcome.

We forecast the 10-year Treasury yield at 4.95% for year-end 2026 and 4.75% for end-2027, with the 2-year at 4.70% this year and 4.50% next year. Credit fundamentals remain sound: the month’s spread widening reflected rate volatility and dealer inventory management rather than deteriorating credit. We continue to favor carrying high-quality income and, in municipals, favor longer duration over Treasuries.

Weekly fixed income snapshot

U.S. Treasuries

Yields rose across the curve in September as the Fed’s hike, firmer economic data and persistent fiscal concerns drove a broad repricing. The front end led initially on the policy move, though longer maturities sold off steadily through month-end, with the 30-year reaching its highest level since 2007. Rate volatility stayed elevated throughout, remaining above April highs into early October.

The 2-year rose 55 bps in September to 4.83%, the 5-year 59 bps to 5.05%, the 10-year 54 bps to 5.27%, the 20-year 43 bps to 5.67% and the 30-year 39 bps to 5.62%.

Tax-exempt municipals

Municipals declined sharply and underperformed the broader market, their longer duration leaving them particularly exposed to the move in rates. With the index yielding 4.63% and high yield municipals at 6.11%, absolute yields sit at levels that have historically drawn buyers. We view periods of technical weakness as a potential opportunity to add high-quality duration and favor longer duration in municipals over Treasuries.

The Bloomberg Municipal Index returned -4.36% in September.

Taxable municipals

Taxable municipals fell alongside the broader repricing, pressured by the sector’s longer duration. Higher absolute yields near 5.84% are increasingly providing a natural clearing mechanism and attracting crossover investor demand. We view the current backdrop as a potential opportunity to lock in elevated yields at attractive valuations.

The Bloomberg Municipal Taxable Index returned -3.18% in September with spreads at 53 bps.

Investment grade corporates

The market endured a turbulent month as surging Treasury yields and heavy supply, including one of the largest corporate offerings on record, pushed spreads to their widest levels in months. Index yields climbed to roughly 6%, a 10-year high, even as aggregate spreads remained historically tight. Lower-quality and more cyclical sectors underperformed as investors favored higher-quality credit.

The Bloomberg U.S. Corporate Bond Index returned -2.72% in September with spreads at 82 bps.

U.S. high yield corporates

High yield had a difficult month as rising rates, heavy new issue supply and shifting risk sentiment weighed on the market, with cash prices drifting lower through the final weeks. Spreads widened materially and yields rose toward 8.3%, reflecting broad deterioration in tone. New issuance stayed active, though performance on recent deals was poor, leaving the market technically weaker and more defensive heading into October.

The Bloomberg High Yield 2% Issuer Capped Index returned -2.52% in September with spreads at 306 bps.

Preferred securities

Capital securities came under pressure as the rate selloff accelerated, with trading heavily skewed toward selling as hedge funds reduced risk, and real money addressed fund outflows. Additional Tier 1 (AT1) bonds were especially hard hit amid negative sentiment around European banks, while U.S. preferreds and hybrids held in comparatively better. New issuance was minimal, and the one deal that came to market struggled from the outset, with at least one prospective issuer standing down given conditions.

The ICE Preferred Index returned -2.65% in September with spreads at 166 bps.

Senior loans

Loans were the standout performer, delivering a positive return while every other major sector declined, insulated from the duration selloff by their floating-rate structure. The month brought a historically strong primary calendar, with supply running well above typical levels. Heavy issuance pulled the share of loans trading above par down meaningfully and slowed opportunistic refinancing. Steady demand from CLOs helped offset the pressure, and the market showed signs of stabilizing into month-end as rates retreated from their highs.

The S&P Leveraged Loan Index returned +0.26% in September with spreads at 485 bps.

Securitized credit

Agency MBS underperformed sharply as rate volatility spiked, with the basis reaching a one-year high intramonth and spreads widening materially, though renewed demand for agency floaters offered relative value within the sector. ABS proved comparatively resilient, with deals generally pricing into firm demand and spreads finishing modestly tighter. The notable soft spot was data center paper, where heavier supply weighed on mezzanine bonds. CLO spreads softened before stabilizing, with top-tier paper continuing to attract strong demand. CMBS secondary flows rose substantially on continued customer selling, and longer-duration tranches were most affected.

The Bloomberg MBS Index returned -3.38% in September with spreads at 40 bps. The Bloomberg CMBS Index returned -1.65% with spreads at 68 bps. The Bloomberg ABS Index returned -0.96% with spreads at 40 bps.

Global emerging markets

EM debt declined with the global rates selloff, and spreads decompressed as high yield sovereigns underperformed their investment grade counterparts. Local markets also fell as the dollar strengthened. Retail outflows accelerated sharply into month-end, with both hard and local currency funds seeing redemptions. New issue activity was quiet as the macro backdrop kept issuers on the sidelines. Deals that did price generally traded well in the secondary market.

The Bloomberg Global EM Index returned -2.91% in September with spreads at 179 bps.

U.S. Treasury market yields

Fixed income characteristics and returns