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 28, 2026.
Economic Commentary
- Headline PCE increased by +0.4% in April, slightly below the +0.5% consensus. On a year-over-year basis, the PCE deflator rose 3.8%. Gasoline, recreational goods & vehicles, and food & beverage were some of the culprits, while bright spots were financial services, motor vehicles & parts, furnishings and durable household equipment.
- Core PCE increased +0.2%, slightly below expectations, and the year-over-year rate was +3.3%.
- Q1 GDP was revised lower from 2.0% down to 1.6%, with personal consumption slowing to 1.4% from the initial 1.6%.
- Personal income was flat, nominal spending rose +0.5%, and inflation-adjusted spending rose only +0.1%. The savings rate fell from 3.2% to 2.6%, the lowest since June 2022.
- Fed Governor Chris Waller, one of the more dovish FOMC participants of late, said he “would support removing the ‘easing bias’ language in our policy statement to make it clear that a rate cut is no more likely in the future than a rate increase.” Although he said the Fed shouldn’t consider a hike anytime soon, his openness to a hike is an inflection point in how Fed officials view current risks. Waller cited higher inflation expectations or inflation reaching 4% as possible grounds for hiking rates in the future.
- The University of Michigan’s Consumer Sentiment Index was revised down to 44.8, the lowest on record. Current conditions and expectations both fell, primarily due to inflation concerns. Year-ahead inflation expectations rose from 4.5% to 4.8%, and long-term inflation expectations rose from 3.4% to 3.9%. Consumers are feeling higher gas and diesel prices, which will leak into other categories in the coming months.
Our Take
Recent economic data shows the rise in headline inflation, which should also bleed into core inflation in the coming months as petroleum prices work their way through plastics, transportation, and other areas of the economy. For now, consumers have been spending above their means and drawing down savings, possibly supplemented by their asset prices with equities near all-time highs, but this would not be sustainable over an extended period of time. Therefore, if the conflict does not end soon and prices do not moderate, demand destruction could be the logical progression, taking economic activity lower in areas other than AI-related investment activity.
Corporate Bond Market Commentary
- Investment grade bond spreads tightened -1bp to +74bp and total returns were +0.45%.
- IG new issuance was $33.6 billion, and book coverage was 4.2x, attrition was 20%, NICs were 4.1bp and deals tightened 29bp on average from initial price talk to final pricing.
- IG fund flows were +$4.42 billion.
- High yield bond spreads tightened -6bp to +274bp and total returns were +0.26% (BBs +0.25%, Bs +0.29%, CCCs +0.26%).
- HY fund flows were an outflow of -$776 million.
- Only 2 high yield deals priced last week totaling $1.5 billion – RR Donnelley and Granite Construction. This week’s holiday-shortened calendar is also muted.
- Dealers were hit on another $0.4 billion HY bonds, pushing their net long position to a YTD high of $4.6 billion.
Our Take
If the near-term peak in UST rates has passed, corporate bonds could grind higher given that credit quality is sound, technicals are adequate, and all-in yields make bonds attractive relative to stocks. With the earnings season essentially completed aside from a few retailers and private companies on a delayed reporting cycle, fundamental credit issues are unlikely to be the derailer of performance in the near term.
Municipal Bond Market Commentary
- The municipal bond index returned -0.02% last week.
- Muni yields were +6, +7, +7, and +7, and ratios were +1%, +1%, +2%, and +2% to 66%, 62%, 68%, and 88% at 1, 5, 10, and 30 years respectively.
- Muni fund flows were +$2.537 billion, including +$544 million into mutual funds and $1.993 billion into ETFs.
- Last week, municipal bond issuance was $12.2 billion. This week’s holiday shortened the new issue calendar is $9.1 billion.
Our Take
We continue to view muni all-in yields as attractive at current levels, with 30-year muni yields around 4.47% and 10-year yields around 3.09%. Technicals should be favorable with stronger principal and interest reinvestment dollars ahead, and tax-related outflows in the rearview.
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