Sticky inflation tests markets as credit holds firm

Key takeaways

• U.S. inflation and rates remain elevated
• Credit markets continue to show resilience
• Opportunities are emerging across securitized and high yield assets

Inflation remained a central focus for investors this week, particularly in the United States.

Headline inflation continues to run above 3.3% year over year, while the labor market has remained resilient. The U.S. economy added 115,000 jobs, well above consensus expectations of 65,000. At the same time, wage inflation has stayed relatively muted.

Taken together, markets are increasingly pricing in an extended pause from the Federal Reserve through the remainder of 2026, with expectations for a potential rate hike shifting into early 2027.

Bond yields moved higher during the week. The U.S. 10-year Treasury yield rose from roughly 4.3% at the end of April to around 4.48%, driven in part by a stronger-than-expected producer price index reading. Markets are now focused on the upcoming release of the Fed’s preferred inflation measure, core PCE, later this month.

Outside the U.S., UK bond markets experienced increased volatility amid political uncertainty, softer labor market data and persistent energy-related inflation pressures. UK 10-year gilt yields moved above 5%, reflecting rising inflation expectations.

Despite elevated macro uncertainty, credit markets have remained relatively stable.

Bond market volatility, as measured by the MOVE Index, has moderated significantly from earlier highs this year. Investment grade credit spreads tightened modestly during the week, while high yield spreads remained relatively contained.

Within investment grade markets, longer-duration bonds and larger issuers have outperformed, creating potential relative value opportunities in smaller issuers and shorter-duration segments.

Issuance activity also remains robust, particularly in sectors tied to artificial intelligence. Hyperscaler issuance has already surpassed total 2025 levels, with borrowers increasingly issuing debt across global markets including Canada, Europe and Japan.

This growing cross-market issuance activity could gradually reshape the composition of global investment grade credit markets.

Two areas continue to stand out within fixed income markets: agency mortgage-backed securities and fallen angels.

Agency mortgage-backed securities have delivered strong performance in 2025, supported by ongoing purchases, along with improving demand expectations from banks and overseas investors. Within high yield, fallen angels remain attractive. These are bonds that were previously rated investment grade before being downgraded into high yield markets.

Historically, fallen angels have often experienced overselling during the downgrade process before valuations normalize over time. With default rates remaining relatively low and corporate fundamentals still solid, this segment continues to offer selective opportunities for investors.