The Fixed Income Digest: Heat check

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The Fixed Income Digest: Heat check

Heat Check

Cooling CPI, but higher rates still matter

June CPI provided another welcome inflation surprise and reinforces the view that

inflation pressures are gradually moderating. Yet markets remain driven more by resilient

growth, elevated real rates, and ongoing AI investment than by inflation alone. The 10-

year Treasury yield has climbed back to roughly 4.6%, and technicals suggest a move

toward 4.65%—or even 4.80%—before a durable bond rally develops. Our longer-term

view is that both the 2-year and 10-year Treasury will end 2026 near 4.5%, versus

current levels of 4.14% and 4.55%, respectively. While we remain underweight duration,

municipals and bank preferreds offer attractive opportunities to add exposure given

compelling yields and supportive technicals

Carry continues to outperform duration

The leadership trends that defined 2025 and the first half of 2026 remain intact.

Equities continue to outperform fixed income, while floating-rate and carry-oriented

sectors remain the primary drivers of returns. AAA CLOs have been the strongest-

performing major fixed-income sector this year (Exhibit 1), benefiting from elevated

front-end rates, strong structural protections, and persistent demand. By contrast, long-

duration Treasuries remain among the weakest performers as higher real yields pressure

rate-sensitive assets. Preferred exposures include long-end municipals, bank preferreds,

leveraged loans, ABS, CRE CLOs, agency and non-agency MBS floaters, AAA CLOs, and

short-duration investment-grade credit

Spreads resilient, but supply is rising

We are not yet ready to adopt a broadly bearish view on credit spreads. Economic

growth remains solid, corporate fundamentals are healthy (92% of companies reporting