Week Ending: March 27, 2026

Stagnant Story

Elevated oil prices and talk of a recession have many colleagues and clients uttering the word “stagflation” and wondering if we should worry about a “repeat of the 1970s.” We think such prognostications are premature. First, as a refresher, stagflation is a portmanteau of a stagnant economy beset by inflationary impulses. So far, the current period pales in comparison to the poster child of stagflation, the 1970s, when the misery index, the sum of inflation and unemployment, was in the double digits worldwide. Second, the circumstances that provided the kindling for the 1970s were a series of shocks and poor monetary policy responses over the course of a decade, not a one-time spike in oil prices. We’d include the end of Bretton Woods in 1971, the 1973-1974 oil embargo, the 1979 Iranian revolution, and the 1980 Iran-Iraq war as examples of the series of shocks that hit one after another over the course of a decade. As a result, in 2026 dollars, oil prices increased 5x to $90 in 1974, surged to $180 in 1979, and remained elevated until the mid-1980s. Stagflation is on our radar, but it's not yet our primary concern.

Highlights of the Week:

High Yield: Although high yield spreads have widened by 41 basis points (bps) and the yield on a 5-year Treasury Note has increased by 34 bps this year, the high yield index total return is only down -0.83%. Why? A shorter duration profile and healthy coupon income have boosted total returns by 1.54% this year. With high yield bonds yielding 7.44%, coupon income should continue to buffer investors against wider spreads and higher rates.

Corporates: Investment-grade corporate spreads have been volatile but resilient this month amid the ongoing Middle East conflict. Widening mid-month to 93 basis points (bps), spreads have fallen back to 86 bps, just 2 bps wider on the month and 8 bps wider on the year.

Municipals: For the week ending March 25, 2026, LSEG Lipper reported $599 million in outflows from weekly reporting municipal funds. This marks the first weekly outflow in 18 weeks, as recent volatility and a bear market in U.S. rates affected investor sentiment. Despite this pullback, year-to-date inflows remain strong at $24.1 billion, ranking among the three highest totals recorded at this point in the year.

Equities: U.S. equities fell for a fifth week in a row, with volatility rising amid ongoing geopolitical uncertainty and persistent inflationary pressures that have dampened expectations for future Federal Reserve rate cuts. Sector performance was mixed: communication services, technology, and financials underperformed, while energy, materials, and utilities led the market.

Securitized Products: The residential mortgage credit market remains resilient despite recent challenges. Year-to-date, new issuance has reached $70 billion, almost 50% higher than last year's rate. Additionally, volatility in rates has put downward pressure on valuations. However, steady demand has limited spread widening to only 30 basis points (bps) in senior tranches and 50 bps in mezzanine tranches from their respective tights.