The second quarter of 2026 was characterised by higher-for-longer interest rate expectations, renewed attention to inflation, and high capital market activity. The US Treasury market opened in April with the 2-year yield at 3.80%, above the pre-war 2026 low of 3.38%. The 2-year yield then moved higher to 4.22% in mid-June, before rallying in the second half of the month to close at 4.18%, a net increase of 38 basis points (bps).
The 5- and 10-year US Treasury yields followed a similar pattern, ending the quarter 16 to 28 bps higher. New Federal Reserve (Fed) Chairman Kevin Warsh’s first Federal Open Market Committee (FOMC) meeting was the dominant macroeconomic event of the quarter. The committee chose to hold rates steady at 3.63%. However, the accompanying dot plot, which shows policymakers' individual interest-rate projections, revealed a hawkish tilt: nine of the eighteen officials projected at least one rate increase in 2026, with several expecting two or more. Additionally, Warsh explicitly vowed to pull back on forward guidance, or providing advance indications of the likely path for future interest rates, to preserve flexibility as economic conditions evolve. Market expectations for Fed policy rates shifted significantly during the quarter, with investors now anticipating one rate hike by year-end compared to two to three rate cuts priced in at the beginning of the year.
Despite the Fed's hawkish tone, capital markets for corporate and securitised products remained firm, closing the quarter on a strong note. Investment-grade corporate issuance exceeded $200 billion for the month, the second-highest monthly total on record. SpaceX and NVIDIA each priced $25 billion bond offerings, tying for the ninth-largest investment-grade bond issuance of all time.
The Secured Overnight Financing Rate (SOFR), a measure of the overnight secured borrowing rate in the US, ended the month at 3.68%. At month-end, the 3-month term SOFR rate was 3.73%, and the 3-month US Treasury bill closed at 3.82%.
