RBC’s BlueBay Fixed Income team discusses how US markets have shown resilience with contained inflation, though heavy tech sector debt issuance from AI investment creates credit market pressure while raising questions about potential future inflationary risks.
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Hello and welcome back to the Weekly Fix. My name is Mindy Gudmundson, and I am an Institutional Portfolio Manager with RBC’s BlueBay Fixed Income team.
Over the past week, US Treasury yields have traded in a narrow range following a robust payrolls report, which eased concerns about labor market deterioration. The broader narrative remains one of economic resilience, which was further supported by January’s Headline CPI figure, which rose just 0.2 percent for the month and 2.4 percent over the last 12 months. Census expectations were slightly higher, making this a welcome report, though it’s notable that inflation is still well above the Fed’s stated target of 2%. Market pricing continues to reflect two Federal Reserve rate cuts this year, and absent a material inflation surprise in the coming months, this pricing is unlikely to shift near-term. Treasury volatility remains subdued, with the MOVE (Merrill Lynch Option Volatility Estimate) index not far from its 5-year low.
Within US credit markets, strong demand reflects low recession risk and contained default expectations. This demand, however, is encountering significant new issuance stemming from elevated 2026 capital expenditure projections, particularly within the technology sector, which continues to scale AI-related investment. This supply wave is exerting technical pressure on investment grade spreads, while high yield remains relatively well positioned with stronger fundamentals and shorter duration profiles. A critical question is whether AI adoption and monetization will accelerate sufficiently to translate near-term investment into sustainable productivity gains and financial returns.
Another important theme to watch is the potential inflationary implications of the AI investment cycle. While there is considerable optimism about AI-driven productivity gains, the near-term rush to deploy capital could generate upward pressure on prices if firms compete for scarce raw materials, components, and skilled labor. Should inflation remain contained despite this surge in investment, it would be an encouraging signal that productivity gains are arriving sooner than expected. January's moderated CPI reading provided some encouragement; however, caution is warranted against complacency, as tariff impacts and other economic headwinds could still materialize.
In summary, US markets remain characterized by macro stability, subdued rate volatility, resilient credit performance, and heavy corporate issuance. We will continue to monitor the data for signs of inflationary pressure. Beyond that, the interplay between AI-driven investment, productivity gains, and price pressures may prove central in determining the next phase for both rates and risk assets.
Thanks for joining us today and be sure to tune in next week!
Key points
January CPI rose just 0.2% monthly and 2.4% annually, below consensus, keeping two 2026 rate cuts priced in.
Technology sector's elevated 2026 capex projections are generating significant new supply in investment grade credit markets, creating technical spread pressure while high yield remains well positioned.
The AI investment cycle presents dual risks—whether monetization will justify near-term spending and whether competition for resources could generate inflationary pressure before productivity gains materialize.