Week Ending: July 10, 2026
Patience Thinning
The minutes from Chair Kevin Warsh's debut Federal Open Market Committee (FOMC) meeting, released this week, showed that most participants thought a rate hike would be warranted if inflation remained above target and the labor market solidified. An important factor fueling policymakers' concerns is that core inflation has exceeded the Fed's 2% target for over five years, following a decade of inflation running mostly below target. Most policymakers are worried that "after several years of inflation above 2%, continued elevated inflation rates could begin to affect inflation expectations and wage- and price-setting decisions." Indeed, if inflation doesn't start making progress toward 2% soon, households and markets might lose confidence in the Fed's ability to deliver price stability over any useful time frame. This would de-anchor inflation expectations and trigger second- and third-round inflationary effects as workers demand higher wages to compensate. While most policymakers are comfortable staying on hold for now, their patience is wearing thin.
Highlights of the Week:
High Yield: The first high yield data center deal was priced last August, and the segment now accounts for more than 3% of the market. Nearly every data center issuer carries a BB rating, but prudent investors will look beyond headline ratings to assess fundamental credit strength, which varies materially across issuers.
Corporates: This week saw $51 billion in investment-grade (IG) corporate issuance, led by a $25 billion deal from Amazon, marking the second time this year that an Amazon deal has ranked among the top 10 largest IG deals ever. Despite the surge in issuance, spreads have held steady and are just one basis point (bp) wider on the week, at an option-adjusted spread (OAS) of 75 bps.
Municipals: Municipal bond mutual funds recorded $1.4 billion in inflows for the week ended July 8th, extending the positive streak to 12 consecutive weeks. Year-to-date inflows reached $57 billion, the second-highest pace on record. Demand remained concentrated in investment-grade funds, which saw $1.3 billion in inflows, while ETFs slightly outpaced open-end funds. Strong technicals continue to support the market, as investors readily absorb elevated new-issue supply.
Equities: U.S. equities ended the week higher, led by a rebound in AI-related stocks and strength in the Energy sector amid rising oil prices. Market leadership remained highly bifurcated, with Technology and Energy each gaining more than 2%, while Materials and Health Care declined about 2%.
Securitized Products: As market-implied interest rate outlooks have shifted from Fed rate cuts to potential rate hikes, mortgage rates have held steady near 6.5%. Prepayment speeds have consequently been benign. While borrowers may bemoan the lack of improvement in strained affordability, investors can enjoy solid valuations.
