Key takeaways
- Oil's 9% climb amid Middle East tensions pushed Treasury yields sharply higher, with the curve bear-flattening across maturities.
- Markets now price a 38% chance of a Fed rate hike at this week's meeting, a notable increase.
- Despite spread widening, credit fundamentals remain solid as rate moves—not credit deterioration—drove negative fixed income returns.
Market recap
Markets faced renewed unrest as Middle East tensions boosted oil prices 9%, reviving inflation fears and overshadowing last week’s moderate CPI and PPI data. Global rates climbed broadly, and the U.S. Treasury curve bear-flattened in a reversal from last week’s rally. The 2-year yield rose 15 basis points (bps) to 4.33% and the 30-year yield climbed 9 bps to 5.16%. Markets now price a 38% chance of a rate hike at this week’s U.S. Federal Reserve meeting, up sharply from prior expectations. Equities held mostly steady, buoyed by strong corporate earnings.
Fixed income returns were broadly negative amid the sharp rate move. The Bloomberg U.S. Aggregate Bond Index returned -0.74%, with investment grade corporates at -0.92% and preferreds at -0.71%. High yield corporates returned -0.57% and emerging markets at -0.75%, while MBS returned -0.77%.
Fixed income outlook from this week’s activity
All eyes turn to this week’s Fed meeting. We expect the committee to hold rates steady, but acknowledge the risk to higher rates has grown materially amid oil-driven inflation concerns. Fed Chair Warsh is likely to emphasize that policy remains dependent on incoming inflation and labor data, with no changes imminent. We maintain our year-end 2026 forecast of 4.25% to 4.50% for the 10-year Treasury yield, though upside risks have increased.
Credit fundamentals remain broadly supportive. This week’s spread widening stemmed from the rate selloff rather than deteriorating credit quality. Investment grade corporate primary markets remain active, on pace to challenge all-time monthly issuance records. Looking ahead, we favor carrying high-quality income, with spread sectors offering attractive all-in yields near multi-year highs as volatility persists.
Weekly fixed income performance snapshot
U.S. Treasuries
The yield curve bear-flattened, reversing last week’s gains as the rapid ascent of oil prices overshadowed cooler inflation data. Markets now price a 38% chance of a rate hike at this week’s Fed meeting, with multiple hikes possible by year-end. Rate volatility rose sharply, with the MOVE Index climbing 13 points to 80, and yields remain well above their 10- and 20-year averages.
The 2-year Treasury yield rose 15 bps to 4.33%, the 5-year rose 15 bps to 4.43%, the 10-year rose 13 bps to 4.68%, the 20-year rose 11 bps to 5.18% and the 30-year rose 9 bps to 5.16%.
Tax-exempt municipals
Tax-exempt municipals declined meaningfully, underperforming as the rate selloff weighed on longer-duration bonds. The sector still offers attractive income for patient investors. We maintain our preference for longer duration in munis over Treasuries and view any potential weakness as a buying opportunity.
The Bloomberg Municipal Index returned -1.19%.
Taxable municipals
Taxable munis declined as the sector’s longer duration profile amplified the impact of rising rates. Year-to-date performance turned slightly negative, though demand from crossover investors persists at elevated yield levels.
The Bloomberg Municipal Taxable Index returned -0.79% with spreads at 50 bps.
Investment grade corporates
Investment grade spreads finished modestly wider, though flows skewed toward buying as the rate backup drew in yield buyers. Hyperscalers faced pressure from AI uncertainty and heavy supply, while bank spreads outperformed on strong earnings. July volume remains on pace to challenge all-time monthly records, driven largely by Big Six bank issuance following earnings.
The Bloomberg U.S. Corporate Bond Index returned -0.92% with spreads at 79 bps.
U.S. high yield corporates
High yield corporates opened on stable footing, but sentiment softened as rate volatility and data center supply concerns weighed on the market. Thursday was the weakest session, with cash trading down materially on expectations of further data center supply. Spreads closed wider, with yield-to-worst at multi-month highs, and primary supply totaled approximately $5.7 billion.
The Bloomberg High Yield 2% Issuer Capped Index returned -0.57% with spreads at 280 bps.
Preferred securities
Preferred securities finished lower, driven primarily by the rates selloff rather than spread widening. Domestic preferreds and hybrids declined, while AT1s saw broader weakness in longer-duration deals. Spreads in both U.S. preferreds and AT1s remained broadly stable as buyers stepped in on weakness, reinforcing that rates—not fundamentals—continue to dictate direction.
The ICE Preferred Index returned -0.71% with spreads at 155 bps.
Senior loans
The senior loan market opened quietly with below-average secondary volumes, though the tone stayed firm as bids continued to outnumber offers. The persistent supply-demand imbalance supported prices even as activity remained subdued. Primary activity was robust, with 11 deals totaling approximately $14.1 billion.
The S&P Leveraged Loan Index returned +0.06% with spreads at 491 bps.
Securitized credit
Agency MBS widened in sympathy with the rate selloff. Non-qualified mortgage issuance continued at a heavy pace, with multiple deals pricing wider. ABS markets stayed active despite macro headwinds, as a heavy primary calendar met strong demand. CLOs remained rangebound, with demand for higher-quality, shorter-duration paper keeping levels steady. CMBS secondary flows slowed modestly as buyers focused on longer-end risk, with short duration rallying marginally while longer maturities widened.
The Bloomberg MBS Index returned -0.77% with spreads at 29 bps. The Bloomberg CMBS Index returned -0.42% with spreads at 65 bps. The Bloomberg ABS Index returned -0.28% with spreads at 42 bps.
Global emerging markets
EM hard currency sovereigns widened modestly, with high yield underperforming investment grade as the risk-off tone persisted. EM corporates outperformed, benefiting from the Treasury move that aided spread tightening. Local markets lost ground as rate volatility hit currencies broadly, while new issuance picked up at $13.25 billion.
The Bloomberg Global EM Index returned -0.75% with spreads at 166 bps.
U.S. Treasury market yields
| Maturity | Yield | Week | Month-to-date | Year-to-date |
|---|---|---|---|---|
| 2-year | 4.33 | 0.15 | 0.16 | 0.86 |
| 5-year | 4.43 | 0.15 | 0.20 | 0.70 |
| 10-year | 4.68 | 0.13 | 0.21 | 0.51 |
| 30-year | 5.16 | 0.09 | 0.21 | 0.31 |
| Source: Bloomberg L.P., 24 Jul 2026. Performance data shown represents past performance and does not predict or guarantee future results. | ||||
Oil’s prices surging past $100 sent Treasury yields sharply higher, with the 10-year yield at 4.68% ahead of this week’s Fed meeting.
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 | 4.58 | - | 5.71 | -0.64 | -1.01 | -0.73 |
| U.S. government related | 4.94 | 37¹ | 5.21 | -0.64 | -0.98 | -0.21 |
| Municipal | 3.94 | - | 6.71 | -1.19 | -1.98 | 0.30 |
| High yield municipal | 5.65 | 153² | 7.39 | -0.92 | -1.57 | 2.45 |
| Taxable municipal | 5.28 | 50¹ | 7.49 | -0.79 | -1.25 | -0.09 |
| U.S. aggregate bond | 4.97 | 29¹ | 5.85 | -0.74 | -1.18 | -0.57 |
| U.S. corporate investment grade | 5.47 | 79¹ | 6.63 | -0.92 | -1.61 | -0.77 |
| High yield 2% issuer capped | 7.46 | 280¹ | 2.99 | -0.57 | -0.43 | 1.52 |
| Preferred securities | 6.53 | 155¹ | 5.55 | -0.71 | -0.56 | 1.02 |
| Senior loans³ | 9.07 | 491 | 0.25 | 0.06 | 0.72 | 2.09 |
| U.S. mortgage-backed securities | 5.25 | 29¹ | 5.63 | -0.77 | -1.19 | -0.21 |
| U.S. commercial mortgage-backed securities | 5.09 | 65¹ | 3.68 | -0.42 | -0.47 | 0.29 |
| U.S. asset-backed securities | 4.83 | 42¹ | 3.03 | -0.28 | -0.24 | 0.83 |
| Collateralized loan obligations, AA | 5.32 | 134¹ | 0.25 | 0.08 | 0.32 | 2.92 |
| Collateralized loan obligations, BB | 11.99 | 770¹ | 0.25 | 0.22 | 0.71 | 2.52 |
| Global emerging markets | 6.29 | 166¹ | 5.82 | -0.75 | -1.27 | 0.73 |
| Global aggregate (unhedged) | 4.01 | 29¹ | 6.20 | -0.72 | -1.16 | -1.37 |
| 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, 24 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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