Treasury rally delivers broad fixed income gains

Key takeaways

• Treasuries snapped a multi-week selloff as oil prices eased, but sticky inflation and a patient Fed cloud the outlook.
• Credit spreads tightened broadly, reflecting resilient demand despite historically compressed valuations.
• Consumer spending and AI investment support growth, but persistent inflation and geopolitical tensions keep the longer-term rate outlook uncertain.

Market recap

U.S. Treasuries snapped a multi-week selloff, with yields falling 9 to 12 basis points (bps) across the curve as oil prices eased and inflation concerns moderated. The 2-year yield declined to 4.01%, while the long bond slipped back below 5% after peaking at 5.20% earlier in the month. The U.S. Federal Reserve is widely expected to hold rates steady at the June meeting. Equities remained resilient near all-time highs.

The rate rally lifted returns across fixed income. The Bloomberg U.S. Aggregate Bond Index returned +0.83%. Emerging markets returned +1.09%, followed by investment grade corporates at +0.97%, high yield at +0.55%, preferreds at +0.48%, and senior loans at +0.14%.

Outlook

With a June hold largely priced in, the more pressing question is how long rates stay elevated. Core inflation remains above the Fed’s target despite oil’s pullback, and labor market data have sent mixed signals, giving policymakers little reason to pivot. Markets are pricing hikes into late 2026 and early 2027, suggesting rates could stay higher for longer than many had expected.

The broader growth picture remains constructive, underpinned by resilient consumer spending and sustained investment in technology and AI. Middle East geopolitical tensions persist, though early signs of diplomatic progress have helped ease energy market pressure. We maintain our 4.00% to 4.25% forecast range for the 10-year Treasury yield, with the risk profile looking more balanced after the week’s sharp rate reversal.

Weekly fixed income snapshot

U.S. Treasuries

Yields reversed a multi-week selloff, declining broadly as oil prices eased and inflation concerns moderated. The curve bull-flattened modestly, with the long end outperforming. The 2-year yield fell to 4.01% from a monthly high of 4.15%, and the 30-year moved back below 5% after peaking at 5.20%. Current yield levels remain well above their 10- and 20-year historical averages.

The 2-year Treasury yield fell 12 bps to 4.01%, the 5-year fell 12 bps to 4.14%, the 10-year fell 12 bps to 4.44%, and the 30-year fell 9 bps to 4.97%.

Tax-exempt municipals

Tax-exempt municipals posted strong gains, supported by the Treasury rally and steady demand for tax-advantaged income. The favorable summer period and attractive starting yields continue to underpin the sector.

The Bloomberg Municipal Index returned +1.03%.

Taxable municipals

Taxable municipals posted strong gains, benefiting from the Treasury rally given the sector’s longer duration profile. Crossover demand from non-U.S. investors and institutions remained constructive, and the sector’s yield advantage over comparably rated corporates continues to attract interest.

The Bloomberg Municipal Taxable Index returned +0.99% with spreads at 53 bps.

Investment grade corporates

Investment grade corporates posted strong returns as the rate rally combined with resilient spreads. The Memorial Day holiday week in the U.S. brought notably lighter volumes and range bound secondary trading. Demand undercurrents remained strong — supported by fund inflows, lower net supply and robust new issue order books averaging 4–5x oversubscribed. Primary issuance surpassed $40 billion in the holiday-shortened week, well ahead of expectations, with new issue concessions averaging just 4 bps.

The Bloomberg U.S. Corporate Bond Index returned +0.97% with spreads at 72 bps.

U.S. high yield corporates

High yield posted a constructive week, opening firm and maintaining a stable tone throughout. Month-end portfolio rebalancing was the dominant flow theme, and B rated credits outperformed. Technicals remain favorable, with manageable supply relative to demand and default expectations well contained.

The Bloomberg High Yield 2% Issuer Capped Index returned +0.55% with spreads at 257 bps.

Preferred securities

Preferred securities posted modest gains as the rate rally provided a tailwind for Additional Tier 1 securities (AT1s), domestic preferreds and hybrids. Spreads tightened 3–4 bps, with excess returns of 12–16 bps. Exchange-traded fund inflows were supportive, with new deals from two large issuers seeing strong demand. Coupon income continued to attract yield-oriented investors.

The ICE BofA U.S. All Capital Securities Index returned +0.48% with spreads at 154 bps.

Senior loans

Senior loans posted a modest positive return, supported by active CLO ramping that kept demand consistent. The tone was constructive but increasingly name- and sector-specific, with higher-quality paper well bid while tech/software and insurance broker credits felt somewhat heavy. The week’s headline was a record-setting term loan that attracted $31 billion in demand and priced at a tighter spread than initially offered to investors.

The S&P Leveraged Loan Index returned +0.14% with spreads at 487 bps.

Securitized credit

Securitized sectors posted positive returns across the board as declining rates and lower implied volatility provided a tailwind. Agency MBS current coupon spreads tightened 2–3 bps, recovering from mid-month wides to settle back into a familiar range. ABS issuance continues to track ahead of last year’s record pace, with spreads near the tight end of recent ranges. CMBS secondary slowed into month-end, though spreads held firm across tenors.

The Bloomberg U.S. Mortgage-Backed Securities Index returned +0.83% with spreads at 22 bps. The Bloomberg CMBS ERISA-Eligible Index returned +0.56% with spreads at 65 bps. The Bloomberg Asset-Backed Securities Index returned +0.42% with spreads at 47 bps.

Global emerging markets

Emerging markets debt posted strong gains as renewed hopes of a U.S.-Iran peace deal drove spread tightening and lifted sentiment broadly. Hard currency sovereigns tightened 7 bps, with high yield and frontier credits leading the way. Retail inflows rose to $897 million, concentrated in hard currency funds. New issuance was lighter due to the Eid holiday, though deals that came to market were well received, with books averaging 3x oversubscribed.

The Bloomberg Global Aggregate Unhedged Index returned +1.09% with spreads at 166 bps.

U.S. Treasury market yields

Fixed income characteristics and returns