ISM data revealing a Fed policy dilemma, resilient Q1 earnings, and a massive week of IG issuance headline this week’s fixed income commentary for the week of May 7, 2026.
Economic Commentary
- April ISM Services Index fell from 54.0 to 53.6, a tenth below consensus. Production rose two points to a solid 55.9 and employment rebounded from 45.2 to 48.0 — still in contraction but improving. New orders tumbled from 60.6 to 53.5 and prices paid were unchanged at 70.7, below estimates of 73.5.
- April ISM Manufacturing illustrates the Fed’s current policy dilemma. The prices paid component rose to 84.6 — its highest since Russia’s invasion of Ukraine — with one respondent comparing conditions to the supply chain crisis of a few years ago. The employment component fell from 48.7 to 46.4, with the survey’s director noting that for every comment on hiring, there were 1.7 on reducing headcounts. Rising inflation alongside a deteriorating labor market leaves the Fed with no easy policy choice.
- March JOLTS showed job openings fell marginally from 6.92M to 6.87M. The openings rate dipped a tenth to 4.1% and the quits rate rose a tenth to 2.0%. Openings appear to have stabilized just below 7 million after nearly three years of declines, suggesting a stable labor market.
- Boston Fed President Susan Collins told reporters she also supported dropping the easing bias from the April FOMC statement — in line with the three hawkish dissenters — but did not dissent as she is not a voter. She still expects the Fed will eventually ease further.
- Treasury left nominal coupon and FRN auction sizes unchanged, in line with expectations. Forward guidance was also unchanged. TBAC minutes indicated the dealer community anticipates increases to nominal coupon auction sizes in early 2027 and expects Treasury to modify its guidance several quarters ahead of any such change.
- Q1 GDP came in at 2.0% q/q SAAR, below expectations, driven by a larger-than-expected drag from net exports. Consumption was stronger than expected at 1.6% q/q SAAR and investment spending was also firm.
- Initial jobless claims of 189k were the lowest since 1969.
- The employment cost index rose +0.9%, slightly above estimates.
- Core PCE rose from 3.0% to 3.2%, reaching its highest level since November 2023.
Our Take
Recent economic data generally reflects a healthy economy that is so far shrugging off higher prices and geopolitical uncertainty. The K-shaped economy is well-known, but indications are that it is worsening — higher energy prices, the loss of SNAP benefits, and elevated costs for daily necessities are having an outsized impact on lower-income households. Meanwhile, near-record asset prices support the wealth effect for higher earners. That higher-income segment represents a smaller share of the population but a larger share of overall spending, so as long as those consumers remain confident and the massive wave of AI investment continues to generate spending and employment, the economy could maintain its resilience.
Corporate Bond Market Commentary
Investment Grade (IG) Bonds
- IG spreads widened 1bp to +81bp; total returns were -0.43%.
- IG new issuance was $63 billion across 24 borrowers — well ahead of the $20–25 billion estimate — including a $25 billion deal from Meta. NICs were 3bp, books were 4x covered, attrition was 20%, and deals tightened 30bp on average from IPT to final pricing.
- IG fund flows were +$1.6 billion.
High Yield (HY) Bonds
- HY spreads tightened 9bp to +277bp; total returns were +0.03% (BBs -0.02%, Bs +0.08%, CCCs +0.11%).
- HY new issuance was $7.6 billion, including deals from SE Cosmos, Abercrombie & Kent, FirstCash, Oxford Finance, and Tract. April supply of $38.5 billion was the highest monthly total since September and the busiest April since 2021.
- HY fund flows were +$1.5 billion; leveraged loan flows were +$13 million.
Our Take
We are now more than 75% through Q1 earnings season, with the fundamental backdrop remaining supportive. Beat rates are elevated and price reactions skew positive: 85% of companies have beaten EPS, 79% have beaten revenue, and 49% of stocks have traded higher post-print. Corporate earnings are inherently backward-looking, and the war’s impact on Q1 was limited at most. The duration of the conflict will determine how lasting the effect on demand and costs could be. Markets are currently pricing in a relatively quick return to normalcy, even though the conflict has already lasted longer than initial expectations.
Municipal Bond Market Commentary
- The municipal bond index returned -0.28% last week.
- Muni yields rose +14bp, +11bp, +9bp, and +5bp at the 1-, 5-, 10-, and 30-year maturities; ratios moved to 65%, 62%, 67%, and 86% at those same tenors.
- Last week’s new issue volume was $10 billion; this week’s calendar is $13.1 billion ($12.2 billion tax-exempt). Year-to-date issuance is running 8% above last year’s pace.
- Fund flows were +$852 million, including $133 million into mutual funds and $719 million into ETFs.
Our Take
Last week’s volatile market driven by rising Treasury rates may represent an opportunity to add to municipal bond positions, as technicals look generally favorable ahead. Elevated yields should attract yield-focused buyers in the weeks to come.
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