Rising Treasury yields, persistent inflation concerns, and resilient credit markets define this week’s fixed income landscape. Here is our analysis of economic conditions, corporate bonds, and municipal markets for the week of May 21, 2026.
Economic Commentary
The Fed Minutes released this week revealed that a majority of the FOMC warned the Fed may need to consider a rate hike if inflation continues to run persistently above its 2% target. Many members — suggesting more than three voters — favored removing the easing bias. The vast majority worried inflation would take longer to return to 2% than previously expected. The minutes confirm a hardening reluctance to cut rates and an emerging willingness to consider a hike.
- 30-year US Treasury yields have reached their highest levels since 2007.
- UK inflation moderated unexpectedly, falling from 3.1% to 2.5%, with services inflation dropping from 4.5% to 3.2%.
- Stocks have remained buoyant despite a 73bp rise in 10-year UST yields and a 55bp rise in 30-year yields since the war began.
- By one measure, the S&P 500 would need to fall close to 10% for the equity risk premium to return to pre-war levels.
- Kevin Warsh begins his tenure as Fed Chair on Monday; the first FOMC meeting is scheduled for June 16–17.
- The Atlanta Fed GDPNow Forecast is tracking 4.257% for Q2, while the Bloomberg consensus of 62 economists stands at 1.8%.
- Fed funds futures now imply a 70% probability of a rate hike by year-end, with the first full hike priced in by March 2027.
Our Take
Interest rates have pushed relentlessly higher due to widely understood factors — war impact, inflation, and growing deficits both domestically and abroad. Risk markets have remained resilient, betting that growth will stay robust and not be derailed by higher rates. Even if that proves correct, the relative value of bonds versus equities — assessed through dividend yield or equity risk premium analysis — could be compelling enough to draw cross-asset investors toward increased fixed income allocations. Any signs of stability or progress toward ending the war could significantly accelerate this rotation.
Corporate Bond Market Commentary
Investment Grade (IG) Bonds
- IG spreads tightened 4bp to +75bp; total returns were -0.99%.
- IG supply totaled $52 billion across 33 issuers, slightly above the $50 billion estimate.
- Order books were 4.1x oversubscribed; new issue concessions averaged 2.9bps; attrition was 21%; deals tightened 29bp on average from initial price talk to final pricing.
- IG fund flows were +$4.0 billion last week.
High Yield (HY) Bonds
- HY spreads tightened 1bp to +280bp; total returns were -0.50% (BBs -0.44%, Bs -0.50%, CCCs -0.97%).
- HY supply totaled $8.35 billion, including deals from Kennedy-Wilson, DirecTV, Wayfair, Murphy Oil, Starwood Property, Amerigas, Par Petroleum, Encore Capital, Travel & Leisure, Rithm Capital, and Encompass Health.
- HY fund flows were +$943 million; leveraged loan flows were +$408 million.
- Dealers were hit on $1.5 billion last week, pushing their net long position to a year-to-date high of $4.2 billion.
Our Take
Spreads remain too tight to absorb the significant move higher in risk-free rates, causing sharp total return losses last week. Despite the drawdown, markets remain orderly and new issuance has been resilient. All-in yields could look attractive relative to other asset classes for both IG and HY. IG credit quality is sound, and for most of the HY market, if economic activity remains resilient, credit quality should follow. That said, sectors on the wrong side of higher energy prices or elevated interest rates will continue to face headwinds.
Municipal Bond Market Commentary
- The municipal bond index returned -0.88% last week — the worst performance since April 2025.
- Muni yields rose +9, +10, +11, and +12bps at the 1-, 5-, 10-, and 30-year maturities; ratios moved to 66%, 61%, 66%, and 86% at those same tenors.
- Municipal bond supply was $11 billion last week; 30-day visible supply stands at $16.7 billion.
- Muni fund flows were +$1.531 billion, including $526 million into mutual funds and $1.005 billion into ETFs.
Our Take
Municipal bond yields moved higher, tracking the broader rise in US Treasuries. Continued inflows and favorable principal and interest reinvestment seasonality provide some technical support to the market. The yields currently on offer should look compelling to the traditional retail municipal bond buyer base.
Important Information
Investors should consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. The prospectus contains this and other information about a fund. To obtain a prospectus, visit sheltoncap.com or call (800) 955-9988. A prospectus should be read carefully before investing.
It is possible to lose money by investing in a fund. Past performance does not guarantee future results. Any projections or other forward-looking statements regarding future events or the performance of markets, companies, or otherwise are not necessarily indicative of, and may differ from, actual events or results.
INVESTMENTS ARE NOT FDIC INSURED OR BANK GUARANTEED AND MAY LOSE VALUE.
