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Key takeaways
- Cooler CPI and PPI data reduced near-term Fed hike expectations, pushing the 10-year Treasury yield down to 4.55%.
- Strong bank earnings drove a credit spread rally, with fundamentals staying supportive amid record investment grade issuance and resilient demand.
- We favor carrying high-quality income over the next several months as spread sectors offer attractive yields.
Market recap
Cooler-than-expected U.S. inflation dominated the narrative. Core CPI came in flat month-over-month versus expectations and PPI declined. This led markets to scale back expectations for near-term U.S. Federal Reserve rate hikes and drove a bull-steepening in Treasuries. Renewed Middle East tensions boosted oil prices, though the move was largely contained and provided only a modest counterweight to the broader bond rally.
Bank earnings were the other defining story. Strong results reinforced the AI infrastructure build-out narrative and sparked a rally in credit spreads. Equities softened as capital expenditure concerns weighed on technology and semiconductor sector valuations.
Fixed income returns were broadly positive. The Bloomberg U.S. Aggregate Bond Index gained +0.13%, with investment grade corporates returning +0.07%, preferreds +0.10% and MBS +0.14%. High yield edged up +0.03% while emerging markets slipped -0.17%.
Fixed income outlook from this week’s activity
Rates are likely to remain range-bound as cooling inflation competes with persistent geopolitical uncertainty. This week’s data reinforced the view that the Fed remains data-dependent with an eventual path toward easing. Corporate earnings now take center stage, with results from major technology and financial companies poised to shape sentiment in the week ahead. We forecast the 10-year Treasury yield in a range of 4.25% to 4.50% at year-end 2026.
Credit fundamentals remain broadly supportive. Investment grade issuance continues at a record pace against resilient demand, and spread sectors still offer attractive yields despite risk premiums sitting compressed relative to historical averages. We favor high-quality income over the next several months.
Weekly fixed income performance snapshot
U.S. Treasuries
The yield curve bull-steepened as cooler-than-expected CPI and PPI data pushed front-end rate expectations lower. The 2-year led the rally while the long end held steady. U.S. Federal Reserve Chair Kevin Warsh’s two-day testimony passed without incident, and renewed Middle East tensions offered only modest offsetting pressure. Yields remain well above their 10- and 20-year averages.
The 2-year Treasury yield fell 3 bps to 4.18%, the 5-year fell 3 bps to 4.28%, the 10-year fell 1 bp to 4.55%, the 20-year was unchanged at 5.07% and the 30-year rose 1 bp to 5.07%.
Tax-exempt municipals
Tax-exempt municipals declined, underperforming Treasuries as the long end continued to lag. The sector remains well-positioned year-to-date, and we favor longer duration in municipals over Treasuries given attractive income potential for patient investors.
The Bloomberg Municipal Index returned -0.40%.
Taxable municipals
Taxable munis gained modestly, benefiting from the Treasury bull-steepening given their longer-duration profile. Year-to-date performance remains solid and crossover investor demand continues to support valuations.
The Bloomberg Municipal Taxable Index returned +0.22% with spreads at 50 bps.
Investment grade corporates
Investment grade spreads widened modestly, with dispersion concentrated in TMT names while the broader market remained stable. Strong bank earnings drove a post-results rally in financial spreads. Supply surged well above expectations to $48 billion, driven largely by the largest U.S. banks following quarterly results. Demand remained robust despite the heavy calendar, with coverage ratios in line with year-to-date averages.
The Bloomberg U.S. Corporate Bond Index returned +0.07% with spreads at 77 bps.
U.S. high yield corporates
High yield gained modestly, supported by a constructive technical backdrop. Calls, maturities and coupons combined for a significant technical inflow, and higher-quality names outperformed. Primary supply stayed light.
The Bloomberg High Yield 2% Issuer Capped Index returned +0.03% with spreads at 268 bps.
Preferred securities
Preferred securities gained modestly as prices held steady across domestic preferreds, hybrids and AT1s. Spreads widened slightly, lagging the Treasury rally — unsurprising given summer trading conditions. Regional bank preferred issuance picked up, with further supply expected as numerous issues approach call dates in the coming months.
The ICE Preferred Index returned +0.10% with spreads at 153 bps.
Senior loans
Loans traded with a firmer tone, supported by persistent collateralized loan obligation (CLO) and bank demand that kept buying interest strong. Higher coupon and wider-spread paper outperformed while names with tighter spreads lagged. Primary market activity picked up meaningfully. Issuance stands at $474.8 billion year-to-date, which is essentially flat year-over-year, underscoring a market where technical strength continues to outpace supply.
The S&P Leveraged Loan Index returned +0.18% with spreads at 489 bps.
Securitized credit
Agency MBS tightened modestly, outperforming Treasuries as rate volatility declined. Mortgage credit issuance picked up, with multiple non-qualified mortgage deals marketing and pricing. ABS secondary market activity was muted as accounts focused on the heavy primary calendar. Issuance is running well ahead of last year’s record pace with deals remaining well-subscribed. CMBS secondary flows improved as the buying streak extended and spreads held steady.
The Bloomberg MBS Index returned +0.14% with spreads at 27 bps. The Bloomberg CMBS Index returned +0.18% with spreads at 66 bps. The Bloomberg ABS Index returned +0.14% with spreads at 43 bps.
Global emerging markets
EM hard currency sovereigns widened modestly as the risk-off tone from geopolitical re-escalation weighed on the space. Local markets returned +0.13% hedged (-0.02% unhedged) with most currencies struggling against a stable dollar. Inflows stand at $28.5 billion year-to-date, while new issuance was subdued at $5.1 billion as geopolitical risks kept issuers sidelined.
The Bloomberg Global EM Index returned -0.17% with spreads at 166 bps.
U.S. Treasury market yields
| Maturity | Yield | Week | Month-to-date | Year-to-date |
|---|---|---|---|---|
| 2-year | 4.18 | -0.03 | 0.00 | 0.71 |
| 5-year | 4.28 | -0.03 | 0.05 | 0.55 |
| 10-year | 4.55 | -0.01 | 0.08 | 0.38 |
| 30-year | 5.07 | 0.01 | 0.12 | 0.23 |
| Source: Bloomberg L.P., 17 Jul 2026. Performance data shown represents past performance and does not predict or guarantee future results. | ||||
Soft inflation and strong bank earnings delivered a rare double positive — rate relief and tightening credit spreads arrived together.
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 | 4.44 | - | 5.80 | 0.15 | -0.37 | -0.09 |
| U.S. government related | 4.79 | 36¹ | 5.26 | 0.09 | -0.34 | 0.43 |
| Municipal | 3.73 | - | 6.61 | -0.40 | -0.80 | 1.50 |
| High yield municipal | 5.54 | 161² | 7.26 | -0.26 | -0.66 | 3.40 |
| Taxable municipal | 5.16 | 50¹ | 7.52 | 0.22 | -0.46 | 0.70 |
| U.S. aggregate bond | 4.83 | 28¹ | 5.89 | 0.13 | -0.45 | 0.16 |
| U.S. corporate investment grade | 5.31 | 77¹ | 6.72 | 0.07 | -0.70 | 0.15 |
| High yield 2% issuer capped | 7.18 | 268¹ | 2.94 | 0.03 | 0.15 | 2.11 |
| Preferred securities | 6.35 | 153¹ | 5.57 | 0.10 | 0.15 | 1.74 |
| Senior loans³ | 8.89 | 489 | 0.25 | 0.18 | 0.66 | 2.03 |
| U.S. mortgage-backed securities | 5.09 | 27¹ | 5.54 | 0.14 | -0.42 | 0.56 |
| U.S. commercial mortgage-backed securities | 4.95 | 66¹ | 3.71 | 0.18 | -0.05 | 0.71 |
| U.S. asset-backed securities | 4.68 | 43¹ | 2.94 | 0.14 | 0.04 | 1.11 |
| Collateralized loan obligations, AA | 5.26 | 137¹ | 0.25 | 0.10 | 0.24 | 2.84 |
| Collateralized loan obligations, BB | 11.91 | 774¹ | 0.25 | 0.35 | 0.49 | 2.30 |
| Global emerging markets | 6.14 | 166¹ | 5.88 | -0.17 | -0.52 | 1.50 |
| Global aggregate (unhedged) | 3.92 | 28¹ | 6.23 | 0.03 | -0.44 | -0.66 |
| 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, 17 Jul 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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