Week Ending: May 22, 2026

Languishing Labour

Financial markets began the week pricing in three Bank of England (BoE) rate hikes over the next 12 months. We’re skeptical, as without the Iran War, we’d likely be debating the number of rate cuts rather than even considering hikes. Why? The UK labour market has been languishing for over a year, with payroll job growth recording a loss of 100,000 jobs in April (subject to revision). Adjusted for labour force size, that is roughly equivalent to a 500,000 monthly job loss in the U.S. Given large job losses, the UK’s single-month unemployment rate climbed to 5.6% in April, the highest reading in over a decade (including Covid)! Further, a weak labour market in the UK has crimped wage growth, and services inflation has slowed as a result. Core inflation, including housing costs (CPIH), has now moderated to 2.8% as of April, down from 4.5% just one year ago, largely due to cratering services inflation. The economic data leads us to wonder: Will the Bank of England really hike with labour languishing?

Highlights of the Week:

High Yield: High yield bond rating upgrades have outpaced downgrades over the past 12 months, thanks to solid credit fundamentals. First-quarter earnings reaffirmed the strong relative financial health of high yield issuers, and we believe 7% yields still offer attractive value for long-term investors.

Corporates: While the on-again, off-again war in Iran continues to keep rate volatility elevated, higher all-in yields continue to entice investors, keeping a lid on any spread widening within investment-grade corporates. The 1-30 year corporate option-adjusted spread stands at 74 basis points (bps), 4 bps tighter on the year.

Municipals: Municipal fund flows remained strong for the week ending May 20th, with LSEG Lipper reporting $1.5 billion in inflows into weekly-reporting municipal bond funds. Flows again skewed toward exchange-traded funds (ETFs) at $979 million, while open-end funds also posted solid inflows of $543 million. April flows totaled $6.1 billion, a notable reversal from the prior four Aprils, all of which recorded outflows. Year-to-date inflows now total $38 billion, the second-highest at this point in the year, trailing only 2021 at $42.5 billion.

Equities: U.S. equities rallied for an eighth straight week, with major indices near record highs. Markets were supported by strong corporate earnings, reports of a potential U.S.-Iran agreement, and continued enthusiasm for the AI infrastructure buildout. Health care, utilities, and real estate led sector performance, while communication services, consumer staples, and energy lagged.

Securitized Products: Treasury rates spiked this week, but commercial mortgage-backed security (CMBS) markets took it in stride, with more than $4 billion in new deals pricing across the market. Highlights included a first-of-its-kind all-multifamily bond deal from MF1 Capital, strong demand for a North Carolina mall securitization, and a Blackstone affordable-housing deal in Florida. The commercial real estate (CRE) collateralized loan obligation (CLO) market is on pace for its busiest year ever.