Fixed Income Digest Rates up, risk on

The Fixed Income Digest Rates up, risk on

Debt-fueled expansion 14 August 2026

The defining theme of the past month has been the market's continued ability to finance United States growing borrowing needs across both the public and private sectors. Treasury yields have Chris Flanagan moved higher, the yield curve has bear steepened, and borrowing costs have increased for FI/MBS/CLO Strategist major AI issuers. Yet broad investment-grade, high-yield, and mortgage spreads remain BofAS near cycle tights. The expansion continues to rely on both heavy government borrowing and growing debt issuance tied to the AI buildout. While investors have demanded higher Alvin Fung ABS Strategist borrowing costs from Treasury issues and hyperscalers alike, that repricing has remained BofAS remarkably contained, with little evidence of broad credit-market contagion. We think further increases in 10y UST yield are the most likely potential catalyst for a risk-off move. We note that BofA technical analyst Paul Ciana has raised the possibility of the 10y yield rising to 5.5%-5.75%, after closing July above 4.62%.

AAA CLOs remain the standout Total return performance leadership remains largely unchanged (Exhibit 1). Leveraged loans, AAA CLOs, and other carry-oriented sectors continue to outperform broad fixed Exhibit 1: Total returns since June 30 income while duration-heavy sectors remain pressured by rising rates. Elevated front- and 2026 YTD end yields, strong structural protections, and continued demand for floating-rate assets S&P 500 leads total returns as of support our preference for senior CLO exposure. While Treasury yields remain under 8/10/2026 upward pressure from growing borrowing needs, low or no-duration carry-oriented Total sectors should continue to compare favorably with broad duration exposure Return (%) Since 2026 Markets remain highly selective Sector (Eff Dur, Eff Yld) S&P 500 (NA, 1.1%) 6/30 YTD 2.49 14.02 One of the key developments of 2026 has been the market's ability to distinguish Leveraged Loans (0.1, 8.3%) 1.21 2.46 between borrowers. Borrowing costs for hyperscalers have moved materially higher as US HY Corp. (3.0, 7.1%) 0.38 2.27 investors evaluate the growing debt requirements associated with AI infrastructure BBB CMBS (2.6, 11.2%) 0.33 2.06 spending. Likewise for the US government, where massive debt growth relative to the Agency CMBS Index (3.8, 4.7%) -0.23 0.40 EM Corp. (4.9, 5.7%) -0.37 1.31 corporate and household sectors continues with no end in sight. At the same time, US Inflation-Linked Treasury aggregate investment-grade and high-yield spreads have remained relatively stable. (4.5, 2.3%) -0.75 0.51 Rather than broadly repricing all credit risk, investors appear focused on the specific EM External Debt Govt. (6.5, -0.85 1.27 issuers and sectors experiencing the greatest supply/funding pressure. 5.9%) FL Preferred Stocks (-1.1, 4.0%) -0.86 1.32 Risk-on persists, but caution remains warranted FX Preferred Stocks (8.9, 6.5%) -0.93 -1.23 US Municipal Securities (7.2, Investor optimism remains elevated, credit spreads remain tight, and risk assets 3.7%) -0.97 1.16 continue to perform well despite higher borrowing costs. We continue to believe that US MBS (5.7, 5.2%) -0.97 0.18 higher rates eventually create greater challenges for risk assets, but recent resilience US Treasury & Agency (5.8, -1.00 -0.57 suggests the timing of a broader risk-off episode may be shifting toward September and 4.6%) October rather than August. Should that occur, longer-duration fixed income would US Broad Index (5.8, 5.0%) -1.02 -0.26 Global Govt. Excluding the US become more attractive as a portfolio diversifier. Until then, we favor quality carry, (7.4, 3.3%) -1.23 -1.28 selective spread exposure, and incremental duration through municipals and bank US IG Corp. (6.4, 5.4%) -1.29 -0.30 preferreds rather than aggressive Treasury positioning Nasdaq 100 (NA, 0.6%) -2.24 17.75 Source: BofA Global Research BofA GLOBAL RESEARCH Trading ideas and investment strategies discussed herein may give rise to significant risk and are not suitable for all investors. Investors should have experience in relevant markets and the financial resources…