Week Ending: June 12, 2026

Hiker's Remorse

The European Central Bank (ECB) hiked its policy rate by 25 basis points this week, the first major central bank to raise rates amid the oil price shock. At the press conference, ECB President Lagarde called the move obvious and sensible “when you have the latest [inflation] reading at 3.2% [and] when you have the inflation outlook over…[our] target throughout most of 2027.” We are not so sure the data justifies the hike. First, headline inflation is rising on higher oil prices, but core inflation shows little acceleration, and moderating wage growth in the euro area should also limit any future pass-through. Second, in our view, an oil price shock is more of a growth drag. In turn, higher rates will further dampen euro area growth, which already slowed sharply in the first quarter of 2026. Third, while short-term inflation expectations have risen, medium- and long-term expectations remain well anchored. Finally, in three of its four hiking cycles, the ECB tightened prematurely in response to higher energy prices, only to reverse course within months —the fastest about-face of any major central bank on average. Will this time be different?

Highlights of the Week:

High Yield: The last time the U.S. men's national team (USMNT) played a World Cup game at home was July 4, 1994, when that year's champions, Brazil's seleção, defeated them. The yield to maturity on the broad high-yield index was 10.7% heading into the holiday weekend, and over the next five years, the asset class returned 10.3% annualized. How will the USMNT fare on their World Cup return home tonight? How will investors fare with yields today in the mid-7s? We don't know yet, but we're optimistic on both fronts.

Corporates: While equities and rates have been moving amid the Iran war and inflation concerns, investment-grade (IG) corporate spreads have remained resilient, with option-adjusted spreads unchanged this week at 73 basis points (bps), just 2 bps above their year-to-date lows.

Municipals: Municipal bond funds recorded an eighth consecutive week of inflows, adding $625 million for the week ended June 10th. Although the pace moderated from recent weeks and remained below the 25-week average, investor demand is still strong, with May inflows revised to a record $12.5 billion. Inflows now total $48.2 billion in 2026, the second-highest year-to-date level on record, reinforcing the favorable technical backdrop supporting municipal valuations.

Equities: The U.S. equity market ended the week modestly higher after a volatile week shaped by Middle East tensions and an AI-driven rotation. Sector performance was mostly positive, with materials, consumer staples, and financials leading the market higher, while communications, consumer discretionary, and technology were the laggards.

Securitized Products: Asset-backed security (ABS) technicals held firm this week as the primary market priced $7.4 billion across 14 deals, pushing year-to-date (YTD) supply to $168 billion, up from $147 billion a year ago. ABS continues to offer relative value versus comparable corporate credits, even as absolute spreads sit near YTD tightness. Consumer ABS credit trends remain well-behaved heading into the second half of the year, with the U.S. labor market and spillover from the Iran conflict as the key areas of focus.