Active Fixed Income Perspectives Monthly Pulse: May 2026
Expert Perspective
|May 20, 2026
Active Fixed Income Perspectives Monthly Pulse: May 2026
Key takeaways
Our base case is that U.S. growth remains resilient, supported by strong corporate earnings and sustained AI-driven investment, despite Iran-conflict-related headwinds.
The near-term supply shock associated with the conflict has put upward pressure on inflation while also keeping higher geopolitical risk premia in play.
The robust AI-driven investment cycle is sustaining near-term demand-driven inflation, despite AI-driven productivity being more likely to support growth and moderate inflation over the medium term.
With the labor market stabilizing and inflation elevated, the likelihood the Fed remains on hold through year-end has increased, with any future easing more limited and backloaded.
Trend-like growth, strong corporate fundamentals, and a neutral-to-supportive Fed underpin a constructive outlook for risk assets, and we plan to stay overweight credit while emphasizing higher-quality carry and security selection.
Outlook: Resilient growth with the Fed likely to remain on hold this year.
Our base case is that U.S. growth remains resilient, supported by strong corporate earnings and sustained AI-driven investment. Recent data points to a stabilizing labor market and upward pressure on inflation, particularly in energy and services.
Persistently above-target inflation and an improved labor-market outlook have shifted our expectations for the monetary policy path modestly higher, raising the likelihood the Fed remains on hold through year-end, with any easing more limited and backloaded. Over the medium term, our conviction is growing that higher AI-related CapEx will lift productivity, boosting trend growth and moderating inflation pressures. However, time horizon matters: in the near term, supply shocks and investment-led demand are putting upward pressure on inflation, and we are attentive to when productivity gains begin to show up in the macroeconomic data.
Upside risks to our outlook include a further acceleration in U.S. domestic strength, faster Iran-conflict resolution, or faster realization of benefits from AI-driven investment. An extension of the Iran conflict, and related geopolitical risk premia and supply-side inflation pressures, remains the main headwind to our base case, while underwhelming or delayed impact from AI investment could pose a medium-term downside risk.
Our active positioning: Long-duration bias in rates, selective carry in credit, and curve-driven value in municipals
Rates: Long-duration bias in the U.S., with targeted, global relative value. In U.S. rates, we maintain a long-duration bias with yields near the top of our expected range for the 10-year Treasury. Outside the U.S., we remain short duration with a curve-flattening bias in Japanese government bonds and underweight the yen as policy normalization in Japan lags inflationary pressure. In global relative value, we are long bunds versus Treasuries, as the stronger relative medium-term U.S. growth outlook should see Treasuries underperform bunds, with ECB tightening already priced. In mortgages, we hold a cycle-normal overweight via hybrid ARMs, CMOs, non-agency RMBS, and reduced ACMBS overweight.
Credit: Overweight, but focused on higher quality carry and security selection. We expect corporate spreads to remain in the 70–90 basis points range through the first half of 2026, supporting an overweight focused on selective carry. With trend-like growth, strong corporate fundamentals, and a neutral-to-supportive Fed underpinning a constructive outlook for risk assets, we plan to stay overweight credit and trade the range opportunistically. We are emphasizing higher-quality carry by trimming high yield and favoring investment-grade banks and recession-resistant utilities, with security selection central to alpha.
Municipals: Steep curve and long-end value support carry and roll down. The steepness of the muni curve offers compelling return potential, with carry and roll down particularly attractive inside 20 years. The long-end ratio of muni yields to Treasuries stands out relative to historical norms and versus the equivalent ratio in shorter maturities. We continue to hold a long muni duration position as a hedge against our long credit exposure, where credit spreads broadly remain attractive relative to history.
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Active Fixed Income Perspectives—Monthly Pulse
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