Key takeaways
- Government bonds rallied as AI and tech stocks sold off, and the risk-off move spread beyond thematic names.
- Duration led returns, while preferreds, loans, high yield and emerging markets lost ground as spreads widened.
- We expect one more Fed hike by year-end, then a hold through 2027, a path less hawkish than markets are pricing.
Market recap
Global fixed income markets saw another flight-to-quality rally in government bonds as AI and technology stocks sold off. Political turmoil kept French bonds under pressure, with spreads between French and German bonds widening at midweek before retreating from their worst levels. Brent crude climbed to $117 per barrel, and the advance in oil prices kept energy-driven inflation concerns in view. Treasury yields fell, but spreads widened as risk-off sentiment took hold, and the decompression extended beyond thematic names into more durable parts of the market.
Total returns followed duration. Municipals and Treasuries led as the rate rally favored longer-duration assets, while preferreds, senior loans, high yield and emerging markets posted losses as spread widening outweighed lower yields. Lowerrated collateralized loan obligation segments were the weakest performers. Quality dispersion persisted within high yield and loans, with higher-rated paper roughly flat and CCC credits lagging.
Fixed income outlook from this week’s activity
The Federal Open Market Committee meets this week alongside a heavy data slate, including PCE inflation and third quarter GDP. We expect the Fed to raise rates once more by year-end, then hold through 2027. This path is less hawkish than current market pricing and depends heavily on how the energy shock passes through to core inflation. With Brent oil prices climbing again this week, that dependency has become more acute.
Credit fundamentals remain sound. The recent spread widening is concentrated in AI-linked and thematic credits rather than reflecting broad-based deterioration, though a second consecutive week of decompression could warrant closer attention. We continue to favor high-quality income and, in municipals, longer duration over Treasuries. We forecast the 10-year Treasury yield at 4.95% for year-end 2026 and 4.75% for year-end 2027, with the 2-year at 4.70% and 4.50%, respectively.
Weekly fixed income snapshot
U.S. Treasuries
Yields fell across the curve, with longer-term rates dropping more than shortterm rates for the second straight week — a pattern known as a bull flattener. Rate volatility stayed elevated even as the rally progressed. Interest rate swaps, which large investors use to manage or hedge exposure to future rates, moved down along with Treasury yields. The gap between swap rates and Treasury yields barely changed, since the recent tightening in long-term rates stalled.
The 2-year fell 2 bps to 4.68%, the 5-year 6 bps to 4.81%, the 10- year 8 bps to 5.00%, the 20-year 10 bps to 5.37% and the 30-year 10 bps to 5.32%.
Tax-exempt municipals
Municipals led the complex for a second consecutive week as the rate rally favored the sector’s longer duration. With the index yielding 4.31% and high yield municipals at 5.90%, absolute yields remain at levels that have historically attracted buyers. We view any technical weakness as a potential opportunity to add high-quality duration and favor longer-duration municipals over Treasuries.
The Bloomberg Municipal Index returned +1.14%.
Taxable municipals
Taxable municipals posted a solid gain as falling yields benefited the sector’s longer duration profile. Absolute yields near 5.61% provide a natural clearing mechanism and typically attract crossover investors. We see the current backdrop as a potential opportunity to lock in elevated yields at attractive valuations.
The Bloomberg Municipal Taxable Index returned +0.71% with spreads at 55 bps.
Investment grade corporates
A volatile week brought notable repricing in thematic technology, media and telecom credits and in French banks, while broader weakness extended into more durable parts of the market. Liquidity narrowed meaningfully, particularly in thematic and higher-beta names. The credit curve flattened as selling concentrated in shorter maturities amid de-risking. Primary supply decelerated and fell short of estimates as higher borrowing costs gave issuers pause, and fund inflows slowed for a second week to well below the four-week average.
The Bloomberg U.S. Corporate Bond Index returned +0.34% with spreads at 89 bps.
U.S. high yield corporates
High yield had a difficult week. It opened roughly unchanged, then weakened through midweek as the AI and data center selloff drove sharp dispersion. Higherbeta names in AI, data center and neocloud saw outsized moves in both directions. On Thursday, funding concerns in AI and telecom pushed cash prices lower. Friday opened mixed, with up-in-quality paper firm while lower-rated, telecom and data center names came under the most pressure. Primary issuance was lighter than in recent weeks.
The Bloomberg High Yield 2% Issuer Capped Index returned -0.11% with spreads at 337 bps.
Preferred securities
Preferreds posted a negative total return, closing lower on heavy early-week selling. Hybrids and Additional Tier 1 (AT1) bonds also declined as French assets came under renewed pressure, and spreads widened across the capital structure. Retail hybrids remained under pressure, with one credit still feeling the effects of the prior week’s disruption. The new issue calendar was busy as the market reopened. Deals carried elevated concessions but met strong demand and traded higher.
The ICE Preferred Index returned -0.39% with spreads at 196 bps.
Senior loans
Loans followed a similarly soft path. They opened quietly, then deteriorated as the new issue calendar picked up and lower-quality names came under pressure. Weakness set in at midweek, with lower-quality levels slipping and loan exchange-traded fund outflows amplifying the tone. Higher-quality names held up better, staying unchanged to modestly lower. Idiosyncratic moves in the airline and cable sectors drove much of the day-to-day activity, and several deals were pulled from syndication, signaling caution among issuers.
The S&P Leveraged Loan Index returned -0.31% with spreads at 518 bps.
Securitized credit
The price gap between agency mortgage-backed securities and the Treasury bonds used to hedge them was unchanged over the week. Mortgages performed well during Thursday’s rally, with Ginnie Maes delivering particularly strong excess returns. The 30-year mortgage rate recovered modestly and remains below its early-October high. Mortgage credit new issuance picked up again as a major industry conference wrapped. ABS paused with a more cautious tone as macro risks and digital infrastructure repricing continue to evolve, though technicals and inflows remain strong. High-quality CLO paper was well bid and roughly unchanged, while lower-rated mezzanine showed more softness. CMBS secondary flows rose as customers bought longer durations, but spreads moved wider and the AAA/BBB basis reached a year-to-date high.
The Bloomberg MBS Index returned +0.75% with spreads at 36 bps. The Bloomberg CMBS Index returned +0.30% with spreads at 72 bps. The Bloomberg ABS Index returned +0.23% with spreads at 49 bps.
Global emerging markets
EM hard currency sovereigns decompressed, with investment grade and high yield spreads both widening and several frontier credits leading the move lower. Corporates followed a similar pattern, with high yield underperforming investment grade and an idiosyncratic situation in a Latin American corporate acting as a major drag. Local markets gained modestly despite weakness in parts of Central Europe and Asia. Retail outflows accelerated for a second week, with local currency flows turning negative and non-exchange-traded fund redemptions picking up. New issue activity ticked up, though demand was below average and books were less oversubscribed than in recent weeks.
The Bloomberg Global EM Index returned -0.08% with spreads at 191 bps.
U.S. Treasury market yields
| Maturity | Yield | Week | Month-to-date | Year-to-date |
|---|---|---|---|---|
| 2-year | 4.68 | -0.02 | -0.21 | 1.21 |
| 5-year | 4.81 | -0.06 | -0.28 | 1.08 |
| 10-year | 5.00 | -0.08 | -0.29 | 0.83 |
| 30-year | 5.32 | -0.10 | -0.31 | 0.48 |
| Source: Bloomberg L.P., 23 Oct 2026. Performance data shown represents past performance and does not predict or guarantee future results. | ||||
A second straight flight to quality pushed the 10-year Treasury yield to 5.00%. Spreads widened on AI and data center stress, but duration drove returns.
Fixed income characteristics and returns
| Index | Yield to worst (%) | Spread (bps) | Effective duration (years) | Returns (%) | ||
|---|---|---|---|---|---|---|
| Week | Month-to-date | Year-to-date | ||||
| U.S. Treasury | 4.89 | - | 5.63 | 0.56 | 1.82 | -0.99 |
| U.S. government related | 5.30 | 41¹ | 5.09 | 0.35 | 1.50 | -0.77 |
| Municipal | 4.31 | - | 6.93 | 1.14 | 3.18 | -1.13 |
| High yield municipal | 5.90 | 140² | 7.46 | 1.31 | 3.25 | 1.51 |
| Taxable municipal | 5.61 | 55¹ | 7.47 | 0.71 | 2.31 | -1.04 |
| U.S. aggregate bond | 5.33 | 32¹ | 5.79 | 0.54 | 1.87 | -1.10 |
| U.S. corporate investment grade | 5.87 | 89¹ | 6.45 | 0.34 | 1.68 | -1.49 |
| High yield 2% issuer capped | 8.39 | 337¹ | 3.10 | -0.11 | -0.20 | -0.09 |
| Preferred securities | 7.23 | 196¹ | 5.47 | -0.39 | -0.16 | -1.65 |
| Senior loans³ | 9.73 | 518 | 0.25 | -0.31 | -0.61 | 2.79 |
| U.S. mortgage-backed securities | 5.63 | 36¹ | 5.74 | 0.75 | 2.30 | -1.09 |
| U.S. commercial mortgage-backed securities | 5.53 | 72¹ | 3.60 | 0.30 | 1.09 | 0.02 |
| U.S. asset-backed securities | 5.24 | 49¹ | 2.90 | 0.23 | 0.82 | 1.09 |
| Collateralized loan obligations, AA | 5.74 | 143¹ | 0.25 | 0.08 | 0.32 | 4.21 |
| Collateralized loan obligations, BB | 13.17 | 840¹ | 0.25 | -1.71 | -2.52 | 2.50 |
| Global emerging markets | 6.85 | 191¹ | 5.64 | -0.08 | 0.85 | -0.67 |
| Global aggregate (unhedged) | 4.30 | 37¹ | 6.13 | 0.29 | 1.10 | -1.59 |
| 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, 23 Oct 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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