Markets appear increasingly willing to look through developments in the ongoing US-Iran conflict. This week’s headlines surrounding a new peace proposal, followed by reports the ceasefire was on “massive life support,” generated only a muted market reaction — a notable shift from earlier episodes of heightened volatility. Risk assets remained resilient, credit spreads tightened, and Treasury markets showed limited signs of sustained flight-to-quality demand. While geopolitical risks have not disappeared, investors appear increasingly focused on inflation, growth, and monetary policy. The challenge for investors is determining whether markets are appropriately discounting geopolitical risk or simply becoming complacent toward it. For now, we think the securitized market continues to offer attractive relative value, with the added benefit of being largely insulated from broader geopolitical risks.
- Kevin Warsh was confirmed by the US Senate as the next Federal Reserve (Fed) Chair by the narrowest margin on record, and is set to inherit a stabilizing labor market alongside persistent inflationary pressures
- April’s non-farm payrolls increased by 115k, exceeding estimates for the second consecutive month; hiring growth was broad-based across sectors, suggesting a resilient labor market despite the economic uncertainty from the Iran war
- The unemployment rate was unchanged at 4.3%, while the labor participation rate declined to 61.8%
- Inflation accelerated in April with headline CPI rising 0.6%, in line with expectations; CPI grew from 3.3% to 3.8% year-over-year, the highest level since September 2023, driven primarily by higher energy and grocery prices
- The spike in energy prices also pressured wholesale inflation and transportation costs, as PPI rose 1.4% in April, above estimates of 0.5% and the largest monthly increase since 2022
- Treasury yields rose across the curve as investors increasingly considered the Fed may need to maintain restrictive policy for longer; the market-implied probability of a rate hike by 2027 is now 50%
- Investment‑grade (IG) corporate issuers continued to issue fresh debt, despite the heavy economic calendar with issuance totaling $52 billion, surpassing dealer forecasts of $50 billion
- High-yield (HY) issuance, however, was temporarily impacted by April’s CPI data as some borrowers pulled new deals; supply still totaled $8 billion
- Demand for IG corporate bonds was robust, as spreads tightened 2bps to 75bps; HY corporate spreads were more sensitive to the prospect of tighter monetary policy with spreads widening 5bps to 267bps
- Agency mortgage-backed (MBS) securities underperformed other securitized sectors as stronger PPI data provided a headwind for the sector; MBS spreads widened 3bps to 21bps on the week
- Municipals outperformed Treasuries as muni/Treasury ratios declined across the curve; municipal bond funds reported $1.1 billion of net inflows last week, marking the third consecutive week of net inflows exceeding $1 billion
Treasury Yield Curve
Month-to-Date Excess Returns
