Key takeaways
- The Federal Reserve held rates steady in a 9-3 vote, but three dissenters favor a hike, raising September's rate hike odds to 65%.
- Oil's sharp reversal came too late to calm rate expectations, as the Treasury curve bear-steepened to a new year-to-date high.
- Credit spreads held firm on strong corporate earnings, supporting a high-quality income strategy amid rate uncertainty.
Market recap
The U.S. Federal Reserve held rates at 3.50% to 3.75% in a 9-3 vote, with three dissenters favoring a 25 basis point (bps) hike. The Bank of England and Bank of Japan also stood pat. Oil prices gave back most of last week’s surge, dropping 7% as Brent settled at $90. But the damage to rate expectations was already done, with markets shifting to price a 65% chance of a September hike. The Treasury curve bear-steepened, with the long bond selling off 11 bps to 5.27%, a new year-to-date high.
The Bloomberg U.S. Aggregate Bond Index returned -0.12%. Investment grade corporates returned -0.06% and preferreds +0.08%. High yield returned +0.18% and emerging markets -0.04%. Mortgage-backed securities returned -0.24%.
Fixed income outlook from this week’s activity
This Fed’s hawkish split makes September a critical meeting, though we don’t expect a hike. Our conviction has softened somewhat given oil’s earlier breach of $100, which continues to work through rate expectations. We maintain our 10-year Treasury yield forecast of 4.25% to 4.50% at year-end 2026.
Credit fundamentals remain solid, backed by strong corporate earnings this quarter. Spreads held firm even as rates sold off, a sign of resilient demand. We continue to favor high-quality income given attractive yields.
Weekly fixed income performance snapshot
U.S. Treasuries
The curve bear-steepened following the Fed’s decision to hold rates at 3.50% to 3.75%. The long bond sold off as markets read the inaction as raising the odds of future hikes, while the 2-year rallied modestly. Rate volatility declined, with the MOVE Index falling 3 points to 77. Markets now price a 65% chance of a September rate hike. Yields remain at post-financial-crisis highs.
The 2-year Treasury yield fell 4 bps to 4.29%, the 5-year rose 2 bps to 4.45%, the 10-year rose 6 bps to 4.74%, the 20-year rose 11 bps to 5.29% and the 30-year rose 12 bps to 5.27%.
Tax-exempt municipals
Municipals posted a volatile but positive week, outpacing broader fixed income through Thursday’s close. Longer Treasury rates rose sharply while long municipal rates fell, flattening the muni curve. Despite July marking the weakest month since 2003, we think the pullback may offer opportunity. Higher starting yields and improved valuations relative to Treasuries create a compelling entry point for investors able to look past near-term noise. August has been historically strong for muni technicals and returns. Fund flows gathered $761 million, though high yield and long-duration strategies saw outflows for a second straight week as investors favored shorter maturities.
The Bloomberg Municipal Index returned +0.13%.
Taxable municipals
Taxable munis declined as Treasury yield bear-steepening pressured the sector’s longer-duration profile. July posted the weakest month since 2003, though we think the pullback may create opportunity given higher starting yields. A heavy $19 billion supply calendar could offer fresh buying at elevated yields.
The Bloomberg Municipal Taxable Index returned -0.42% with spreads at 52 bps.
Investment grade corporates
Investment grade spreads tightened modestly as strong earnings and the rate backup drew yield buyers. Hyperscalers outperformed as expected heavy supply failed to materialize, and bank spreads benefited from the post-Fed steepening curve. Fund inflows decelerated to $3.3 billion, well below the four-week average and the lowest since late April. Supply stayed active, with borrowers capitalizing on favorable windows across three sessions. July volume remains on pace to challenge the all-time monthly record. AI funding needs remain a technical overhang.
The Bloomberg U.S. Corporate Bond Index returned -0.06% with spreads at 78 bps.
U.S. high yield corporates
High yield finished firmer, with cash generically higher despite intraweek volatility tied to Fed positioning and data center credit concerns. The market swung from early gains to sharp midweek losses before bouncing into Thursday. The high yield index tightened on spreads, reflecting a decline in the rate component alongside modest spread decompression. Fund flows were negative at -$640 million, with roughly $3.0 billion in primary supply.
The Bloomberg High Yield 2% Issuer Capped Index returned +0.18% with spreads at 279 bps.
Preferred securities
U.S. preferreds and hybrids finished largely unchanged, with spreads stable as prices tracked rates. Recent new issues traded off their lows as macro conditions firmed, though tone faded later on additional supply. AT1s outperformed on strong buying in Asia. Technicals should remain supportive with 2026 funding needs largely complete.
The ICE Preferred Index returned +0.08% with spreads at 155 bps.
Senior loans
Loans traded sideways, closing relatively unchanged each session amid light secondary market activity and focus on an active new issue calendar. The supply/demand imbalance persisted, supporting prices. Dividend recap activity surged, pushing July volumes to their highest since September 2025. The loan market appeared largely insulated from the Fed decision, underscoring the asset class’s rate insensitivity. Fund flows totaled +$298 million with new issue volume of $19.6 billion.
The S&P Leveraged Loan Index returned +0.08% with spreads at 493 bps.
Securitized credit
Agency MBS current coupon basis moved in sync with rate volatility, tightening early before widening after Wednesday’s Fed-day steepener. Mortgage credit issuance slowed, with only a handful of deals pricing. CMBS secondary flows improved modestly as buyers picked up both investment grade and non-investment grade risk, tilted toward longer duration. Performance was comparable across tenors. ABS saw a pickup in primary activity despite macro headwinds, with strong demand and a range-bound collateralized loan obligation market.
The Bloomberg MBS Index returned -0.24% with spreads at 31 bps. The Bloomberg CMBS Index returned +0.09% with spreads at 66 bps. The Bloomberg ABS Index returned +0.13% with spreads at 42 bps.
Global emerging markets
Emerging markets hard currency sovereigns widened modestly, with balanced performance across investment grade and high yield. Middle East names lagged on geopolitical tensions, and EM corporates saw broader spread decompression. Local markets returned +1.23% hedged, aided by a weaker dollar, though Turkey, Korea and Brazil saw notable currency pressure. Retail flows turned negative at -$369 million from +$741 million the prior week. New issuance was subdued at $5.2 billion amid geopolitical uncertainty and the Fed meeting.
The Bloomberg Global EM Index returned -0.04% with spreads at 167 bps.
U.S. Treasury market yields
| Maturity | Yield | Week | July 2026 | Year-to-date |
|---|---|---|---|---|
| 2-year | 4.29 | -0.04 | 0.12 | 0.82 |
| 5-year | 4.45 | 0.02 | 0.22 | 0.72 |
| 10-year | 4.74 | 0.06 | 0.27 | 0.57 |
| 30-year | 5.27 | 0.12 | 0.32 | 0.43 |
| Source: Bloomberg L.P., 31 Jul 2026. Performance data shown represents past performance and does not predict or guarantee future results. | ||||
The Fed held rates steady, but three dissenters wanted a hike, pushing Treasury yields to fresh highs as credit spreads held firm.
Fixed income investment characteristics and returns
| Index | Yield to worst (%) | Spread (bps) | Effective duration (years) | Returns (%) | ||
|---|---|---|---|---|---|---|
| Week | July 2026 | Year-to-date | ||||
| U.S. Treasury | 4.57 | - | 5.67 | -0.11 | -1.11 | -0.84 |
| U.S. government related | 4.93 | 37¹ | 5.19 | -0.06 | -1.03 | -0.27 |
| Municipal | 3.93 | - | 6.68 | 0.13 | -1.85 | 0.43 |
| High yield municipal | 5.65 | 154² | 7.35 | 0.06 | -1.51 | 2.52 |
| Taxable municipal | 5.32 | 52¹ | 7.45 | -0.42 | -1.66 | -0.51 |
| U.S. aggregate bond | 4.98 | 29¹ | 5.83 | -0.12 | -1.30 | -0.69 |
| U.S. corporate investment grade | 5.46 | 78¹ | 6.60 | -0.06 | -1.67 | -0.83 |
| High yield 2% issuer capped | 7.41 | 279¹ | 2.98 | 0.18 | -0.25 | 1.71 |
| Preferred securities | 6.55 | 155¹ | 5.56 | 0.08 | -0.48 | 1.10 |
| Senior loans³ | 9.09 | 493 | 0.25 | 0.08 | 0.80 | 2.17 |
| U.S. mortgage-backed securities | 5.30 | 31¹ | 5.67 | -0.24 | -1.42 | -0.45 |
| U.S. commercial mortgage-backed securities | 5.07 | 66¹ | 3.69 | 0.09 | -0.38 | 0.38 |
| U.S. asset-backed securities | 4.78 | 42¹ | 3.00 | 0.13 | -0.11 | 0.95 |
| Collateralized loan obligations, AA | 5.31 | 135¹ | 0.25 | 0.09 | 0.41 | 3.01 |
| Collateralized loan obligations, BB | 11.97 | 764¹ | 0.25 | 0.29 | 1.00 | 2.81 |
| Global emerging markets | 6.28 | 167¹ | 5.80 | -0.04 | -1.30 | 0.70 |
| Global aggregate (unhedged) | 4.00 | 29¹ | 6.19 | 0.63 | -0.53 | -0.75 |
| 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, 31 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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