Week Ending: October 2, 2026
Powering Up
Change In Construction Spending Pace Since December 2024*
*Change in the seasonally adjusted annual rate of construction spending put in place in nominal dollars
This week, 10-year Treasury yields reached levels last seen in 2002, even as markets pared expectations for Fed rate hikes. What gives? Well, the economy keeps surprising to the upside. The revised estimate of second-quarter GDP showed the economy grew 2.2%, up from the prior 1.5% reading, driven by stronger consumer spending despite higher energy prices. Meanwhile, AI-led investment remained the primary growth engine, and the momentum appears to be accelerating into the third quarter. The Census Bureau’s August Monthly Construction Spending Report released this week also shows that construction spending on data centers rose 78% year-over-year in August, as demand for AI compute continues to outpace supply. More interestingly, spending on power plants and grid infrastructure has also accelerated in recent months, likely fueled by rising electricity demand from data centers. With the economy on a strong footing, the Fed can focus squarely on elevated inflation. Meanwhile, a higher fed funds rate and strong growth could keep yields higher for longer.
Total Returns By Asset Class
Highlights of the Week:
High Yield: The loan market's resilience during the September rate shock suggests the recent fixed income sell-off is more a duration story than a credit-stress story. Floating-rate loans absorbed the rise in rates and delivered a positive return, while fixed-rate high yield bonds struggled. We believe the high yield bond borrower base generally remains sound, and investors willing to ride out the volatility are well compensated heading into Q4.
Corporates: Paramount Skydance tapped the market this week in both investment grade (IG) and high yield. Within IG, $30 billion was priced across the curve, with books topping out at $109 billion. Despite attractive yields, deal performance was underwhelming, as concerns about the company continue to outweigh any new-issue concessions.
Municipals: For the week ending September 30, municipal funds saw $608 million of outflows, reversing the prior week’s $633 million inflow and marking the second week of outflows in the past three weeks. Tax-related activity persisted, with exchange-traded funds (ETFs) gaining $2.1 billion, while open-end funds lost $2.7 billion. Despite recent volatility, year-to-date inflows stand at $74.9 billion, the second-highest on record for the comparable period, ahead of 2019 at $73.7 billion and trailing only 2021 at $87.9 billion.
Equities: The U.S. equity market broadly declined this week, as continued strength in technology and AI-related stocks was not enough to offset pressure from elevated Treasury yields and ongoing uncertainty surrounding the path of monetary policy. By sector, health care, financials, and consumer staples were the weakest performers, while technology, utilities, and energy led the market.
Securitized Products: Agency mortgages struggled as interest rates climbed and volatility returned. The sector saw its weakest monthly price performance in three years, as extension risk drove broad selling. Mortgage risk premiums widened to 116 basis points versus the 10-year U.S. Treasury. Refinancing opportunities remain limited, and mid-7% mortgage rates are also a major headwind for first-time homebuyers.
Disclosure: This material reflects the firm’s current opinion and is subject to change without notice. Sources for the material contained herein are deemed reliable but cannot be guaranteed.
