Week Ending: June 5, 2026

Hiking Expectations

To hike or not to hike in the face of an energy price shock—that is the question that markets and policymakers alike continue to ask. Debating the first-round effects of the current oil supply shock on prices is one thing, but the challenge is how firms and consumers react to the shock through their future price expectations (so-called second-round effects). Unanchored inflation expectations are a policymaker's worst fear, and rightly so, as they can turn a transitory price shock into a persistent inflation problem. While most central banks have held rates steady since March, they can continue to do so only if inflation expectations remain well anchored. So far, so good in the U.S., with long-term inflation expectations barely budging year-to-date. But Japan may not be so fortunate. In fact, long-term market-based inflation expectations have risen rapidly, eclipsing the Bank of Japan's (BoJ's) 2% target. As BoJ Governor Ueda stated this week, "if the markets perceive that there is a possibility that the [BoJ] might not take appropriate measures to address higher prices, this could be reflected in a rise in long-term interest rates" and "inflict a heavy burden not only on the economy but also on the financial markets." In other words, a hike in June is highly likely.

Highlights of the Week:

High Yield: CCC-rated high-yield bond and broadly syndicated loan spreads are at their widest levels relative to single-B credits in at least ten years, even as broader spreads remain near their tightest levels. The underperformance is more pronounced in loans, where roughly a quarter of CCC-rated borrowers are software companies facing structural headwinds—a distinction that has driven a notable divergence in how the two markets price the same rating category.

Corporates: The first week of June began strongly with $43 billion in issuance, bringing year-to-date totals to $1.05 trillion, up 27% from the same period last year. Investment-grade spreads have held steady at an option-adjusted spread (OAS) of 72 basis points, with all-in yields now around 5.2%.

Municipals: Municipals (Munis) outperformed Treasuries in May, with the Bloomberg Municipal Index returning 0.4% versus 0.1% for Treasuries, while high-yield and taxable munis returned 0.6% and 0.3%, respectively. Strong demand remained a key driver, with muni fund inflows exceeding $10 billion during May and year-to-date flows reaching near-record levels ahead of the summer reinvestment season.

Equities: The U.S. equity market recorded its first weekly decline since late March, as stronger-than-expected economic data heightened uncertainty about the future path of interest rates. Sector performance was mixed, with consumer discretionary, communication services, and technology leading the market lower, while energy, health care, and real estate were the top performers.

Securitized Products: Market technicals remained supportive across European structured products, with asset-backed security (ABS) spreads broadly stable despite elevated issuance volumes. Collateralized loan obligation (CLO) spreads tightened modestly across mezzanine tranches as the broader credit rally continued. Primary issuance remained very active ahead of the Global ABS Conference, with multiple ABS and CLO transactions pricing successfully and attracting strong investor interest, particularly for higher-quality collateral pools.