Fed hikes may be overpriced, but yields stay supported by AI-driven growth. IG carry remains strong as record supply tests spreads.
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Weekly Fix July 6, 2026: Mid-year Outlook
Hope everyone is having a good summer. As we reach the mid-year point, we wanted to share our investment views for the second half of 2026.
Starting with rates, one of the key questions in fixed income right now is whether the bond market has priced too many Fed hikes. Markets have moved in a much more hawkish direction since Chair Warsh's first FOMC meeting, and he has made clear he is moving toward a more data-dependent approach to inflation. That said, if inflationary pressure from oil continues to ease then the front-end of the Treasury curve may have gotten ahead of itself. We've already seen the inflation premium, as measured by breakeven rates, drop below pre-Middle East tension levels.
On the other hand, we expect robust US growth, supported by productivity growth and AI-related investment. That growth premium should help keep yields supported further out the curve. On balance, we expect the Treasury curve to steepen from here — with front-end yields moving lower, while rates from 10-year and beyond remain stable to slightly higher.
Turning to investment grade — we are constructive on corporate credit, but remain highly selective as spreads are tight. Index OAS sits around 74 basis points, with a yield-to-worst of 5.22% — still offering attractive all-in carry for investors. Strong company fundamentals and yield-based demand have supported spreads even amid the heaviest supply environment in years. Year-to-date US IG gross issuance has already crossed the $1.26 trillion mark — matching the record pace set in 2020. July is off to a strong start, with markets forecasting around $130 billion of new supply for the month, which would be the busiest July in a decade.
Within our constructive view, our overweight positions are focused on banks and more defensive sectors, as well as in other pockets of value we see such as corporate hybrids and insurance. Against that, we continue to largely avoid deep cyclicals and BDC bonds.
On tech and data center — this is perhaps the most talked-about theme in IG credit right now. Hyperscalers are expected to borrow as much as $190 billion in the bond market in 2026 alone. We believe issuance will continue at pace, and we see opportunities to gradually build exposure at wider spread levels among those highest quality companies.
Overall, attractive yield carry, active sector and issuer selection amid rising dispersion, and normalization in core rates should together support strong total return potential for full-year 2026.
Thank you and enjoy the rest of your summer.
Key takeaways
The Treasury curve is expected to steepen in the second half of 2026: front-end yields may ease as oil-driven inflation pressure subsides and markets have potentially priced in too many Fed hikes under Chair Warsh's data-dependent regime, while robust AI-related investment and productivity-driven growth should keep yields stable to slightly higher at the 10-year and beyond.
Investment grade credit spreads remain tight — index OAS at 74 basis points with a yield-to-worst of 5.22% — yet strong company fundamentals and yield-based demand have absorbed the heaviest supply environment in years, with US IG gross issuance already crossing $1.26 trillion year-to-date, matching the record pace set in 2020, and July alone forecasted to bring approximately $130 billion in new supply — the busiest July in a decade.
Technology and data center bonds have become the defining theme in IG credit for 2026: hyperscalers are expected to borrow as much as $190 billion in the bond market this year alone, and while the team sees this pace continuing, they are building exposure selectively — targeting wider spread entry points among the highest-quality issuers while remaining overweight banks, defensive sectors, corporate hybrids, and insurance, and largely avoiding deep cyclicals and BDC bonds.