Week Ending: May 15, 2026

Token Deflation

With the flurry of inflation data released this week, we continue to hear inflation fears related to data center buildouts — everything from higher electricity prices to more expensive hardware. However, as we always say, “it’s more complicated!” The cost of using AI models that output tokens to the end user (consumer) may not be rising but falling. What?! Yes, as with the measurement of goods and services inflation, you must adjust for quality improvements. With regard to AI, that means gauging the token cost per unit of a constant or adjusting the level of intelligence. Turns out, for all models that have the same intelligence level as ChatGPT-4, released in November 2023, the cost to produce a million tokens has fallen over 99.9% from the first announced $60 to only $0.05 in January 2026, not to mention that some of these models are far outperforming ChatGPT-4! In turn, token deflation means AI usage is getting cheaper, generating better output, and increasing overall efficiency, which, if sustained in the long run, can be a deflationary productivity boost.

Highlights of the Week:

High Yield: Tight spread levels may be top of mind for valuation-conscious high yield investors, but investing at tight spreads on a historical basis does not preclude attractive returns. In fact, since the post-global financial crisis (GFC) tight on November 14th, 2024, when the index yield was 7.2%, the high yield index returned an annualized 6.6%. Yields are a better predictor of future returns, and with yields at 7% today, valuations appear reasonable.

Corporates: Investment-grade corporate primary markets remained strong this week, with $50 billion in new-issue supply, bringing year-to-date totals to $917 billion, 25% higher than the same time last year. Investors have been locking in these higher yields, pushing investment-grade spreads three basis points (bps) tighter on the week to an option-adjusted spread of 74 bps as of Thursday’s close.

Municipals: LSEG Lipper reported another strong week of municipal fund inflows for the week ending May 13th, with reporting funds adding $1.3 billion, roughly 1.3x the 25-week average. ETFs contributed $809 million, and open-end funds added $541 million. Municipal fund demand remains consistent, with inflows recorded in 23 of the last 25 weeks. Year-to-date inflows have reached $36.5 billion, the second-highest level on record for this point in the year, trailing only 2021 and surpassing 2019 levels.

Equities: The U.S. equity market posted modest gains for the week, supported by continued momentum and stronger-than-expected corporate earnings that helped sustain investor appetite. Sector performance was mixed, with energy, health care, and technology leading the way higher, while consumer discretionary, real estate, and materials lagged.

Securitized Products: U.S. broadly syndicated loan (BSL) collateralized loan obligation (CLO) market activity remained constructive this week, with primary issuance continuing to clear amid strong demand for senior tranches and active participation from banks, insurance companies, and structured credit investors. Secondary spreads were generally stable, though performance continued to differentiate by manager quality, vintage, and exposure to weaker cyclical sectors. Overall sentiment remains supported by healthy technicals and stable fundamentals.