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Key takeaways
- Oil prices above $100 per barrel reignited inflation fears, driving Treasury yields higher across the curve.
- A weaker-than-expected Treasury buyback and firmer inflation data compounded the selloff, pushing the 10-year yield close to 5%.
- Despite the volatility, we see the yield backup as an overshoot rather than a lasting shift, and favor adding high-quality duration in muni bonds.
Market recap
Oil prices above $100 per barrel on Middle East tensions reignited inflation fears, driving a broad selloff in rates. U.S. Treasury yields rose across the curve, led by the front end: the 2-year jumped 26 basis points (bps) to 4.63%, the 5-year 24 bps to 4.78%, the 10-year 19 bps to 4.97% and the 30-year 11 bps to 5.35%. A smaller-than-expected Treasury buyback failed to stem the move midweek, and firmer inflation data late reinforced it. Corporate supply surged post-Labor Day, though demand held firm.
Returns were negative across most sectors: the Bloomberg U.S. Aggregate Bond Index fell -1.04%, investment grade corporates -0.93%, high yield -0.54%, preferreds -0.68%, emerging markets -0.81% and MBS -1.43%. Senior loans were the exception, posting a gain.
Fixed income outlook from this week’s activity
The U.S. Federal Reserve has shown restraint despite stubbornly elevated inflation, but hawkish rhetoric has intensified and markets have begun repricing the odds of a 2026 hike. August core CPI came in slightly hotter than expected, and higher oil prices now have markets pricing roughly 70% odds of a hike at this week’s FOMC meeting.
Credit fundamentals remain sound. We favor high-quality income, and spread sectors still offer attractive all-in yields despite compressed risk premiums versus historical averages. September brings a heavy investment grade supply calendar, though demand appears strong enough to absorb it. In municipals, we view the recent cheapening as an opportunity to add high-quality duration.
Weekly fixed income performance snapshot
U.S. Treasuries
The curve bear-flattened, with short-term rates rising faster than long-term rates, as an oil-driven inflation scare hit the front end hardest. A smaller-than-expected Treasury buyback failed to stem the selloff midweek, and firmer inflation data reinforced it, lifting the 10-year yield to its highest since 2023 and the 30-year to levels last seen in 2007.
The 2-year rose 26 bps to 4.63%, the 5-year rose 24 bps to 4.78%, the 10-year rose 19 bps to 4.97%, the 20-year rose 14 bps to 5.39% and the 30-year rose 11 bps to 5.35%.
Tax-exempt municipals
Municipals sold off sharply and underperformed Treasuries as heavy supply and slow September reinvestment cash compounded the rate move, pushing 30-year muni yields to their highest since February 2011. The weakness was technical rather than a sign of credit deterioration. Some high yield new issues drew strong demand at the cheaper entry point. Muni-to-Treasury yield ratios rose toward historical averages, with the 10-year ratio near 75% and the 30-year near 92%, improving relative value. We continue to favor longer duration in municipals over Treasuries.
The Bloomberg Municipal Index returned -1.23%.
Taxable municipals
Taxable munis declined alongside the broader repricing as rate volatility pressured the sector’s longer-duration profile. Heavy supply has cheapened valuations, but higher absolute yields are increasingly providing a natural clearing mechanism and drawing demand from crossover investors. We see the backdrop as an opportunity to lock in elevated yields at attractive valuations.
The Bloomberg Municipal Taxable Index returned -1.12% with spreads at 51 bps.
Investment grade corporates
Spreads proved resilient, tightening modestly even as volatility spiked and the market absorbed the post-Labor Day supply surge. A calendar light on duration and reduced tech-infrastructure borrowing helped, and demand met heavy volume with oversubscription near 3.7x. The rate backup continues to entice yield buyers at attractive all-in levels.
The Bloomberg U.S. Corporate Bond Index returned -0.93% with spreads at 78 bps.
U.S. high yield corporates
High yield spent the week on the back foot as the macro selloff weighed on sentiment, then firmed Friday after the CPI print. Lower-quality credit held in better than higher-quality paper, a sign the move was due to macro factors rather than fundamentals. Primary market activity was the story, with steady issuance drawing strong real-money demand.
The Bloomberg High Yield 2% Issuer Capped Index returned -0.54% with spreads at 265 bps.
Preferred securities
Preferreds declined as the sharp Treasury selloff pressured the sector’s duration-sensitive profile, though spreads tightened. The primary market was busy, with nine issuers pricing across bank preferreds, hybrids and Additional Tier 1 (AT1) bonds. Earlier deals struggled through the midweek rate move while later ones fared better as rates stabilized. The pipeline should lighten after a heavy week.
The ICE Preferred Index returned -0.68% with spreads at 155 bps.
Senior loans
Loans posted a positive return and outperformed high yield, insulated from the duration selloff by their floating-rate structure. The primary market was exceptionally busy, dominated by repricings alongside new-issue launches, while fund inflows stayed healthy. With a full slate still to price, we think the technical backdrop into month-end appears constructive.
The S&P Leveraged Loan Index returned +0.15% with spreads at 470 bps.
Securitized credit
Agency MBS lagged as the selloff widened spreads, with the belly and lower coupons hardest hit and mortgages underperforming Treasury hedges. Elsewhere, securitized products were well insulated from the midweek volatility as higher all-in yields drew strong demand. ABS opened the month with a robust calendar, and CLO investment grade spreads compressed toward 52-week tights. CMBS secondary flows were slow, with long-duration underperforming.
The Bloomberg MBS Index returned -1.43% with spreads at 35 bps. The Bloomberg CMBS Index returned -0.76% with spreads at 64 bps. The Bloomberg ABS Index returned -0.48% with spreads at 42 bps.
Global emerging markets
EM debt fell with the global rates selloff, though hard-currency sovereign spreads tightened, largely a function of lagging the move in rates rather than improving fundamentals. Retail inflows rose, while new-issue supply came slower than expected as the geopolitical and macro backdrop kept issuers sidelined; deals that did price generally performed well in the secondary market.
The Bloomberg Global EM Index returned -0.81% with spreads at 153 bps.
U.S. Treasury market yields
| Maturity | Yield | Week | Month-to-date | Year-to-date |
|---|---|---|---|---|
| 2-year | 4.63 | 0.26 | 0.28 | 1.15 |
| 5-year | 4.78 | 0.24 | 0.28 | 1.06 |
| 10-year | 4.97 | 0.19 | 0.22 | 0.80 |
| 30-year | 5.35 | 0.11 | 0.11 | 0.51 |
| Source: Bloomberg L.P., 11 Sep 2026. Performance data shown represents past performance and does not predict or guarantee future results. | ||||
Two forces drove last week’s selloff: an oil price spike that reawakened inflation fears and a Treasury buyback that fell short of expectations.
Fixed income investment characteristics and returns
| Index | Yield to worst (%) | Spread (bps) | Effective duration (years) | Returns (%) | ||
|---|---|---|---|---|---|---|
| Week | Month-to-date | Year-to-date | ||||
| U.S. Treasury | 4.87 | - | 5.70 | -0.93 | -1.01 | -1.53 |
| U.S. government related | 5.22 | 36¹ | 5.16 | -0.88 | -0.97 | -0.88 |
| Municipal | 4.28 | - | 7.01 | -1.23 | -1.75 | -1.55 |
| High yield municipal | 5.87 | 133² | 7.68 | -1.17 | -1.59 | 1.11 |
| Taxable municipal | 5.55 | 51¹ | 7.50 | -1.12 | -1.18 | -1.28 |
| U.S. aggregate bond | 5.27 | 30¹ | 5.86 | -1.04 | -1.13 | -1.43 |
| U.S. corporate investment grade | 5.74 | 78¹ | 6.54 | -0.93 | -1.12 | -1.52 |
| High yield 2% issuer capped | 7.62 | 265¹ | 3.03 | -0.54 | -0.66 | 2.01 |
| Preferred securities | 6.69 | 155¹ | 5.51 | -0.68 | -0.88 | 0.30 |
| Senior loans³ | 9.17 | 470 | 0.25 | 0.15 | 0.25 | 3.41 |
| U.S. mortgage-backed securities | 5.57 | 35¹ | 5.81 | -1.43 | -1.44 | -1.37 |
| U.S. commercial mortgage-backed securities | 5.40 | 64¹ | 3.63 | -0.76 | -0.80 | -0.21 |
| U.S. asset-backed securities | 5.10 | 42¹ | 2.91 | -0.48 | -0.50 | 0.73 |
| Collateralized loan obligations, AA | 5.31 | 117¹ | 0.25 | 0.10 | 0.15 | 3.71 |
| Collateralized loan obligations, BB | 12.12 | 752¹ | 0.25 | 0.28 | 0.49 | 4.75 |
| Global emerging markets | 6.39 | 153¹ | 5.72 | -0.81 | -0.91 | 0.53 |
| Global aggregate (unhedged) | 4.27 | 30¹ | 6.17 | -0.77 | -0.60 | -0.90 |
| 1 Option-adjusted spread to Treasuries. 2 Yield difference between the Bloomberg High Yield Municipal Index and the 20-year AAA MMD scale. 3 Spread refers to the 3-year discount margin. Duration is estimated based on the frequency of the reset date. Source: Bloomberg L.P. and Standard & Poor’s, 11 Sep 2026. Performance data shown represents past performance and does not predict or guarantee future results. Unless otherwise noted, the index is Bloomberg. All index returns are shown in U.S. dollars. Yield to worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting. Effective duration (expressed in years) measures the price sensitivity of a fixed-income investment to a change in interest rates, considering that expected cash flows will fluctuate as interest rates change. Index performance is shown for illustrative purposes only. Index returns include reinvestment of income and do not reflect investment advisory and other fees that would reduce performance in an actual client account. |
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Representative indexes: U.S. Treasury: Bloomberg U.S. Treasury Index; U.S. government related: Bloomberg U.S. Government-Related Index; municipal: Bloomberg Municipal Index; high yield municipal: Bloomberg High Yield Municipal Index; taxable municipal: Bloomberg Taxable Municipal Bond Index; U.S. aggregate bond: Bloomberg U.S. Aggregate Bond Index; U.S. corporate investment grade: Bloomberg U.S. Corporate Index; high yield 2% issuer capped: Bloomberg High Yield 2% Issuer Capped Index; preferred securities: ICE BofA U.S. All Capital Securities Index; senior loans: S&P UBS Leveraged Loan Index; U.S. mortgage-backed securities; Bloomberg U.S. Mortgage-Backed Securities Index; U.S. commercial mortgage-backed securities: Bloomberg CMBS ERISA-Eligible Index; U.S. asset-backed securities: Bloomberg Asset-Backed Securities Index; CLO AA: J.P. Morgan Collateralized Loan Obligation AA Index; CLO BB: J.P. Morgan Collateralized Loan Obligation BB Index; global emerging markets: Bloomberg Emerging Market USD Aggregate Index; global aggregate: Bloomberg Global Aggregate Unhedged Index.
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Investing involves risk; principal loss is possible. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, derivatives risk, dollar roll transaction risk and income risk. As interest rates rise, bond prices fall. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Preferred securities are subordinated to bonds and other debt instruments in a company’s capital structure and therefore are subject to greater credit risk. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks may be magnified in emerging markets. Asset-backed and mortgage-backed securities are subject to additional risks such as prepayment risk, liquidity risk, default risk and adverse economic developments. The value of convertible securities may decline in response to such factors as rising interest rates and fluctuations in the market price of the underlying securities. Senior loans are subject to loan settlement risk due to the lack of established settlement standards or remedies for failure to settle. These investments are subject to credit risk and potentially limited liquidity, as well as interest rate risk, currency risk, prepayment and extension risk, and inflation risk. Any investment in collateralized loan obligations or other structured vehicles involves significant risks not associated with more conventional investment alternatives.
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