BLOGThe Bird's Eye View
Timely Perspectives, Unconventional Thinking
We’re excited to share timely market insights, thoughtful perspectives and expert commentary as part of our commitment to providing modern investment solutions to modern challenges.
BLOGThe Bird's Eye View
Timely Perspectives, Unconventional Thinking
We’re excited to share timely market insights, thoughtful perspectives and expert commentary as part of our commitment to providing modern investment solutions to modern challenges.
During the second quarter, easing tensions in the Middle East prompted a strong rally in risk assets, supported by strong earnings and artificial intelligence (AI) investment spending.
Much of this growth has been buoyed by US households’ absorption of tariff- and energy-related price increases. We can see this in the decline in the US personal savings rate to 3%, half the long-term average of 6%.1 Given the very high savings rate of the highest-earning Americans, this trend implies that lower-income households are spending more than they earn and are relying on debt to bridge the gap. This is something to keep an eye on because we expect consumers to eventually revert back to the long-term historical savings rate, to the likely detriment of corporate profit margins.
We expect consumers to eventually revert back to the long-term historical savings rate, to the likely detriment of corporate profit margins.
Meanwhile, spending on data centers and AI infrastructure relative to GDP now exceeds the dot-com peak, funded primarily out of operating cash flow and, increasingly, debt issuance.2 This current rate of growth seems difficult to sustain, in our view. Further, this spending has also produced frictions in the real economy, pushing up prices on inputs ranging from copper to dynamic random-access memory (DRAM) and serving as an inflationary impulse to the economy as a whole.
Although financial conditions in the US are pretty much the easiest they've been in the last couple of decades excepting the Covid-19 period, we have also seen a pronounced shift higher in US interest rate expectations of late even as those for other major economies generally moderated. In part due to the perceived credibility of new Fed Chair Warsh, two-year Treasury yields and the US dollar have risen as gold de-rated.3 That said, the Federal Reserve’s ability to increase interest rates meaningfully is constrained by the government’s need to continually roll over its very large primary deficit at prevailing higher interest rates.
Taxable Fixed Income Markets Update: June 2026
Client Portfolio Manager, Diamond Hill Capital Management
Treasurys and rates. Upbeat labor data and Middle East tensions drove front-end rate volatility in June. A stronger-than-expected May labor report—with 172,000 jobs created versus 88,000 expected—and an upward revision to April payrolls pushed yields higher across the curve, led by the two-year Treasury, which rose from 4.04% to 4.15%.1
That move nearly reversed during the second week of June week as Middle East tensions escalated, but yields held firm until sentiment shifted on two developments: a ceasefire and a more hawkish debut from new Federal Reserve Chair Kevin Warsh. These developments shifted market expectations for Fed action by year-end from 14.3 basis points of rate increases at the end of May to 37.7 basis points by month-end. The yield curve flattened as the two-year rate increased and the longer end of the curve declined slightly.2
Corporate credit. Investment grade corporate spreads widened modestly from near year-to-date lows and ended June at 74.2 basis points, still well below historical averages. The Bloomberg US Corporate Grade Index yield to worst rose from 5.13% to 5.20%.2
SpaceX brought a $25 billion multi-tranche deal to market to refinance debt and fund operations, drawing roughly $90 billion of demand and securing investment grade ratings despite expectations for several years of negative cash flow. More broadly, first-half 2026 corporate bond issuance of $1.19 trillion is running well ahead of historical six-month periods and in line with 2020’s record pace.2
Securitized. During the month of June, Bloomberg US Securitized Index spreads widened from 24.5 basis points to 27.0 basis points, led by agency residential mortgage-backed securities (RMBS) amid uncertainty over rate increases and the Fed’s balance sheet plans for the mortgage market. Asset-backed securities (ABS) spreads tightened from a monthly high of 46.1 basis points to 43.7 basis points. Securitized performance of 0.21% landed between Treasurys at 0.28% and investment grade corporates at 0.19%.2
