Monthly Market Monitor

Macro

Inflation data released in September sent mixed signals to investors. August’s Consumer Price Index showed core prices rose 0.3% month-over-month (m/m), the largest increase since April, underscoring persistent inflation pressures. Shelter costs were a key driver as they re-accelerated after several months of moderation. In contrast, Personal Consumption Expenditures (PCE) data was more encouraging, with core PCE rising 0.2% m/m, below expectations. While partly driven by methodological revisions, the report suggested some easing in underlying inflation pressures. Overall, progress toward the Federal Reserve’s (Fed’s) 2% inflation target remains uneven.

The Fed raised the fed funds rate by 25 basis points (bps) to 3.75%-4.00% at September’s Federal Open Market Committee meeting. Markets had largely anticipated the rate hike, but the hawkish tone of the committee’s projections and the post-meeting press conference took investors by surprise. Chair Warsh described the hike as “removing accommodation,” which many investors interpreted as a signal that policy is not restrictive enough and that additional tightening may be necessary.

September employment data indicated a labor market that continues to cool but remains resilient. Nonfarm payrolls increased by just 29,000, well below expectations of 90,000, while wage growth eased to 3.0% year-over-year. Despite weaker hiring, the unemployment rate increased only slightly to 4.2% as labor force participation rose.

U.S. Treasury yields surged in September, driven by persistent inflationary pressures, resilient economic data, a hawkish Fed and the ongoing conflict in the Middle East. By month end, longer-term yields reached multidecade highs, with most of the yield curve exceeding 5%.

Credit

During the month, investment-grade (IG) markets saw $195 billion of new bonds issued, the second-highest September total on record, placing this year’s volume just $74.4 billion shy of 2020’s pace. However, by late September, elevated yields led some issuers to postpone their deals. The IG Credit Index returned -2.68% in September, with an excess return of -0.02%, which means nearly all of the loss was driven by rates, rather than by changes in credit spreads.

The High Yield Corporate Index returned -2.52% in September, its worst monthly performance since September 2022. Despite spread widening in non-IG credits and a surge in yields, September’s high yield (HY) primary issuance totaled $51.36 billion, making it the busiest month of the year. The month’s most notable deal was Paramount Skydance Corporation’s record-breaking $12.4 billion HY bond sale.

Structured

The Mortgage-backed Securities Index returned approximately -3.38% in September, marking its worst monthly performance since September 2022. Year-to-date total and excess returns have now turned negative for 2026, at -3.31% and -0.73%, respectively. Higher rates and elevated rate volatility contributed to the decline, with rate volatility reaching its highest level in 17 months by month end.

The asset-backed securities (ABS) sector was the best-performing fixed income sector of the month, generating 9 bps in excess returns. Throughout 2026, ABS has outperformed 1-3-year IG corporate bonds on an excess return basis. The relative outperformance has been driven by carry, issuance and spread volatility.

Chart of the Month: Carry Supports Forward Returns

One-year total returns in different interest rate scenarios

• Elevated starting yields can provide meaningful income potential. Both 2- and 5-year U.S. Treasuries are expected to generate positive returns even if yields rise another 100 bps from September 30 levels.
  
  
• In our view, potential gains from falling yields can outweigh potential losses from rising yields, creating an attractive risk/reward profile.

As of 9/30/2026. Source: Bloomberg L.P. View accessible version of chart.