Fixed Income

Weekly View from the Desk

December 8, 2025

Dollar Direction and When Easing Cycles End

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    Macro

    • As we review the performance of the U.S. dollar this year and contemplate its future direction, we find it helpful to compare the current backdrop to the dollar’s resiliency in 2019. The left rectangle in the accompanying chart shows how the dollar weakened against the euro in 2017 even as the nominal five-year rate differential between the two economies widened (i.e., higher U.S. rates pushed the differential deeper into negative territory).
    • Indeed, the EUR/USD strength in 2017 was aided by the combination of stimulus from China (a key European trading partner) and the election of President Macron in France. As those factors peaked in late 2017, the ECB also implemented QE and the prospects for U.S. growth accelerated. As a result, the dollar stabilized in 2019.
    • More recently, as interest-rate differentials narrow, they again appear to be influencing currency movement, particularly as U.S. growth expectations vs. Europe shift in favor of the U.S.. These conditions may again set the stage for further dollar stabilization in 2026. However, from a perspective of risks, we see potential downside risks to the dollar in the tails of our scenario distribution (i.e., recession and overheating) outweighing those on the upside from a potential productivity boom.                         

    Developed Market Rates

    • As participants come to grips with central bank easing cycles that may be nearing an end, a “disappointment trade” is unfolding across several DM markets. For instance, given the prospects that the ECB deposit rate may remain at 2%, or slightly below in the event of an additional cut next year, a rising 10-year bund yield and a 10-year European swap rate have contributed to steeper European yield curves in recent months.
    • In terms of how that trade could emerge in the U.S., particularly amid this week’s Fed meeting, the potential exists that more FOMC participants could see the approximate, current policy level as closer to the neutral rate, which could be reached in the first half of next year (uncertainty remains thereafter amid changes in Fed personnel).
    • With an end to the U.S. easing cycle possibly in sight, the deteriorating fiscal conditions in the U.S. and the incoming Treasury supply could present challenging conditions for long-term U.S. rates. That said, context around the recent backup on the 10-year yield is also warranted as it still remains in the 3.90-4.20% range, and it has essentially remained unchanged over the past two years (~4.18%) as it traded at similar levels in mid-December 2024 and 2023.     
    • Mortgages continued to perform strongly last week with spreads tightening by about 5 bps and nearing the local tights from October. At this point, excess returns for December are close to 29 bps and YTD excess returns are around 150 bps. Our near-term view of the MBS sector is cautious given valuations, and we’re maintaining a neutral view over the long-term given the carry opportunities and the manageable supply conditions.  

    IG Corporates

    • In the U.S., IG corporate spreads tightened by 3-6 bps last week, with the overall index at 77 bps. In terms of quality, spreads on A-rated and BBB-rated bonds also tightened. Front-end securities lagged the longer end slightly. In single names, Bayer and Boeing tightened by 15 bps and 8-10 bps (respectively), while Netflix widened by 5 bps.
    • Issuance slowed to <$30B last week. In terms of demand, mutual fund flows were positive ($6B), overseas buyers remained steady, and dealers sold close to $3B of paper. This week, issuance is expected to fall to $10B. Heading into the final two weeks of the year, limited issuance is anticipated.
    • Most external strategists forecast some softening in technicals and fundamentals in 2026, expecting wider spreads (~100-110 bps) as M&A and AI capex drive increased issuance. In the short term, our outlook has turned positive, while our long-term outlook is still for carry conditions.
    • In the EUR IG market, the tone remained constructive last week as spreads tightened by 3 bps, aligning with the U.S. (OAS +77). In the sterling market, the highest-quality IG corporates are trading at spreads nearly flat to gilts. Issuance slowed to just €7B last week. Only one or two more deals are expected before year end. Our outlook remains unchanged in the short term due to the limited potential for further spread tightening.

    Leveraged Finance

    • U.S. HY bond spreads tightened last week, as mixed economic data, accelerating inflows, and a perceived, near-certain Fed Funds rate cut further fueled a risk-on sentiment. Performance was positive across ratings tiers, with CCCs outperforming Bs and BBs. Among sectors, consumer products, paper & packaging, and technology were the top performers, while diversified media, telecommunications, and food & beverage were the weakest.
    • Retail fund inflows accelerated, with $1.2B across ETFs and actively managed funds returning to the asset class. Last week's flows brings YTD net inflows to over $19B. Primary market activity spiked to a 10-week high, as issuers sought to take advantage of lower yields and refinance-nearly 94% of last week's $11.4B across 14 transactions were for refinancing.
    • The U.S. loan market was flat overall with a firm tone. That said, the percentage of loans trading above par surpassed a four-month high of 53% while the distressed universe (those trading below 80) also increased to a two-year high of 6.8%. As expected, primary market activity picked up from the week prior, with $6.6B across 18 deals pricing, most of which supported refinancing and repricing.
    • European high yield bonds and loans tightened last week, with no specific theme driving the movement beyond consolidation following the AI-driven volatility from the previous week. Five high yield bond deals and four bank loan transactions priced, with most of the issuance being well received. Technicals remain solid on strong demand and limited supply, further supporting the idea that historically tight spreads can coexisting with elevated dispersion, at least over the short-term. 

    Emerging Markets

    • EM hard currency spreads tightened on the back of last week's U.S. Treasury selloff, inflows, strong risk sentiment, and some country-specific developments. With Index spreads now sitting slightly below +260 bps, there have only been four other episodes over the past 15 years when the overall Index was tighter (April 2010, February 2012, June 2014, and February 2018). Of note was the outperformance of single-B names last week, especially in SSA, select CCC, and geopolitical stories that outperformed, i.e., Lebanon and Venezuela. Ukraine underperformed as U.S./Russia/Ukraine/EU remain far apart on a resolution to end the war. Among a few other new issues, South Africa (mid/low BB rated) issued $3.5B of a 12-year (6.25%) and 30-year (7.375%), both of which were well oversubscribed.
    • As we enter 2026, vulnerabilities remain, but yields, carry, and appetite should help spreads throughout Q1. When we look across EM sectors, themes which have been driving returns and positioning continue to play out. If the broader narrative remains supportive of EM (growth, rates, dollar), performance is likely to remain decent, but there are downside risks. Balancing tail risks with attractive idiosyncratic stories and selective relative value opportunities, it seems appropriate to continue with risk and focus on identifying bottom-up stories.
    • EMFX gained last week, with LatAm and Europe outperforming. High-carry currencies were mixed (ZAR, EGP, MXN, TRY strengthened while COP, INR, BRL, PHP were weaker). Low-carry currencies were also mixed, with MYR, TWD outperforming while SGD and KRW underperformed. ZAR traded well on the back of continued strong performance in local bonds. BRL weakened on news that former President Bolsonaro endorsed his son instead of Tarcisio, increasing the likelihood that that Lula will win next year's election. COP was the worst performer last week, seemingly on corporate USD demand and tensions with the U.S. With the Fed meeting on Wednesday, we view this week as pivotal for the remainder of the year as communication about future meetings will likely drive USD sentiment. If the result is another hawkish cut, we would likely turn cautious on EMFX over the short term. Our positioning remains slightly underweight to USD, but the overriding focus is on relative value where we continue with high-carry longs against low-carry shorts.
    • EM local market yields were slightly lower last week, with Turkey, Colombia, South Africa outperforming. The main news was the sharp selloff in Brazil on Friday. We remain watchful for further developments on the political front, but risks of a further selloff in Brazilian local assets have increased substantially. EM corporate spreads tightened last week. Vanke bonds remained under pressure with no signs of any government support and analysts expecting a near-zero recovery if the company goes into liquidation. Vedanta was well bid, with Moody's putting the B2 rating on outlook positive.     

    Securitized Products

    • CMBS conduit AAA spreads were marginally wider on elevated new supply, while subordinate tranches edged tighter. SASB AAA floaters were flat while fixed-rates and subordinate tranches tightened. CRE CLOs held steady, with AAA new issues at +145. Four transactions priced—two SASBs, one conduit, and one CRE CLO.
    • In RMBS, non-QM spreads remained steady overall, as AAAs were flat in anticipation of heavy new supply, while AA tranches and below saw consistently strong demand. Second-liens widened, as expected with looming supply. CRT trading normalized, with activity rebounding and spreads firming. Six deals totaling $2.5B priced last week. Meanwhile, home prices increased 1.7% YTD through September, but signs of cooling are emerging as inventory builds and days on market increase.
    • U.S. CLO spreads were flat overall with only BBBs edging tighter. Benchmark AAAs remained firm in the 120 bp context, while non-benchmarks widened as much as 13 bps with some decompression in the basis. European CLOs were unchanged. The U.S. primary market saw $10B across 22 deals, while €3.8B across nine deals priced in Europe. The U.S. saw 12 new issues, six resets, and four refi's, while Europe saw three new issues and six resets.
    • ABS spreads were range bound with compression across the capital stack—i.e., certain new IG issues widened, but tightened in the below IG segments. We continue to expect heavy new issuance volumes in the U.S. to resume, with this week's pipeline including commercial auto, non-prime card, equipment, fiber, whole business, timeshare, telecom ABS, marine/RV floorplan, and consumer loan transactions.

    Municipals

    • The tax-exempt muni market outperformed Treasuries, with M/T yield ratios on 5-year, 10-year, and 30-year maturities ending last week at 67%, 69%, and 89%, respectively. Year-to-date, the IG Muni Index (~4%) has outperformed the HY Muni Index (~3%), but both have lagged other taxable fixed income sectors-e.g., U.S. Treasuries (+6%), U.S. Corporate Index (+7%), and taxable Muni Index (+8%). That stated, we believe this underperformance may mean "stored alpha" for future a catch up.
    • Last week's calendar totaled $16B but was met with $682M in inflows into funds and ETFs. In addition, around $24B in reinvestment helped absorb supply. Deals were generally well received, although some high yield deals needed to be cheapened to clear balances. Prepay gas deals continued, with several large deals (e.g., BofA, Goldman Sachs, and TD) expected to come to market. This week's calendar is estimated to total ~$10B.
    Topics
    • Markets & Economy
    • Geopolitics

    Source(s) of data (unless otherwise noted): PGIM as of December 2025.

     

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    U.S. Investment Grade Corporate Bonds: Bloomberg Barclays U.S. Corporate Bond Index: The Bloomberg Barclays U.S. Investment Grade Corporate Bond Index covers U.S.D-denominated, investment-grade, fixed-rate or step up, taxable securities sold by industrial, utility and financial issuers. It includes publicly issued U.S. corporate and foreign debentures and secured notes that meet specified maturity, liquidity, and quality requirements. Securities included in the index must have at least 1 year until final maturity and be rated investment-grade (Baa3/ BBB-/BBB-) or better using the middle rating of Moody’s, S&P, and Fitch.

    European Investment Grade Corporate Bonds: Bloomberg Barclays European Corporate Bond Index (unhedged): The Bloomberg Barclays Euro-Aggregate: Corporates bond Index is a rules-based benchmark measuring investment grade, EUR denominated, fixed rate, and corporate only. Only bonds with a maturity of 1 year and above are eligible.

    U.S. High Yield Bonds: ICE BofAML U.S. High Yield Index: The ICE BofAML U.S. High Yield Index covers US dollar denominated below investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, and at least one year remaining term to final maturity as of the rebalancing date.

    European High Yield Bonds: ICE BofAML European Currency High Yield Index: This data represents the ICE BofAML Euro High Yield Index value, which tracks the performance of Euro denominated below investment grade corporate debt publicly issued in the euro domestic or eurobond markets. Qualifying securities must have a below investment grade rating (based on an average of Moody's, S&P, and Fitch). Qualifying securities must have at least one year remaining term to maturity, a fixed coupon schedule, and a minimum amount outstanding of €100 M. ICE Data Indices, LLC, used with permission. ICE DATA INDICES, LLC IS LICENSING THE ICE DATA INDICES AND RELATED DATA "AS IS," MAKES NO WARRANTIES REGARDING SAME, DOES NOT GUARANTEE THE SUITABILITY, QUALITY, ACCURACY, TIMELINESS, AND/OR COMPLETENESS OF THE ICE DATA INDICES OR ANY DATA INCLUDED IN, RELATED TO, OR DERIVED THEREFROM, ASSUMES NO LIABILITY IN CONNECTION WITH THEIR USE, AND DOES NOT SPONSOR, ENDORSE, OR RECOMMEND PGIM FIXED INCOME OR ANY OF ITS PRODUCTS OR SERVICES.

    U.S. Senior Secured Loans: The iBoxx USD Leveraged Loan index family represents the main sections of the USD leveraged loan market. Index constituents are derived using selection criteria such as loan type, minimum size, liquidity, credit ratings, initial spreads and minimum time to maturity.

    European Senior Secured Loans: The index universe of the S&P UBS Western European Leveraged Loan Index is meant to represent assets or activity in Western Europe, and includes loans denominated in EUR, GBP, or USD.

    Emerging Markets U.S.D Sovereign Debt: JP Morgan Emerging Markets Bond Index Global Diversified: The Emerging Markets Bond Index Global Diversified (EMBI Global) tracks total returns for U.S.D-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans, and Eurobonds. It limits the weights of those index countries with larger debt stocks by only including specified portions of these countries’ eligible current face amounts of debt outstanding. To be deemed an emerging market by the EMBI Global Diversified Index, a country must be rated Baa1/BBB+ or below by Moody’s/S&P rating agencies. Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy. The Index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan's prior written approval. Copyright 2021, J.P. Morgan Chase & Co. All rights reserved.

    Emerging Markets Local Debt (unhedged): JPMorgan Government Bond Index-Emerging Markets Global Diversified Index: The Government Bond Index-Emerging Markets Global Diversified Index (GBI-EM Global) tracks total returns for local currency bonds issued by emerging market governments.

    Emerging Markets Corporate Bonds: JP Morgan Corporate Emerging Markets Bond Index Broad Diversified: The CEMBI tracks total returns of U.S. dollar-denominated debt instruments issued by corporate entities in Emerging Markets countries.

    Emerging Markets Currencies: JP Morgan Emerging Local Markets Index Plus: The JP Morgan Emerging Local Markets Index Plus (JPM ELMI+) tracks total returns for local currency–denominated money market instruments.

    Municipal Bonds: Bloomberg Barclays Municipal Bond Indices: The index covers the U.S.D-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The bonds must be fixed-rate or step ups, have a dated date after Dec. 13, 1990, and must be at least 1 year from their maturity date. Non-credit enhanced bonds (municipal debt without a guarantee) must be rated investment grade (Baa3/BBB-/BBB- or better) by the middle rating of Moody's, S&P, and Fitch.

    U.S. Treasury Bonds: Bloomberg Barclays U.S. Treasury Bond Index: The Bloomberg Barclays U.S. Treasury Index measures U.S. dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury. Treasury bills are excluded by the maturity constraint but are part of a separate Short Treasury Index.

    Mortgage Backed Securities: Bloomberg Barclays U.S. MBS - Agency Fixed Rate Index: The Bloomberg Barclays U.S. Mortgage Backed Securities (MBS) Index tracks agency mortgage backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon and vintage.

    Commercial Mortgage-Backed Securities: Bloomberg Barclays CMBS: ERISA Eligible Index: The index measures the performance of investment-grade commercial mortgage-backed securities, which are classes of securities that represent interests in pools of commercial mortgages. The index includes only CMBS that are Employee Retirement Income Security Act of 1974, which will deem ERISA eligible the certificates with the first priority of principal repayment, as long as certain conditions are met, including the requirement that the certificates be rated in one of the three highest rating categories by Fitch, Inc., Moody’s Investors Services or Standard & Poor’s.

    Palmer Square AAA CLO DM Index represents the discount margin of CLO AAA rated tranches in the Palmer Square CLO Senior Index, which is designed to reflect the investable universe of U.S CLO senior original rated AAA and AA debt issued after Jan 1, 2011.

    Global Aggregate Bond Index is a  measure of global investment grade debt from twenty four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.

    U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index: The Bloomberg Barclays U.S. Aggregate Index covers the U.S.D-denominated, investment-grade, fixed-rate or step up, taxable bond market of SEC-registered securities and includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS sectors. Securities included in the index must have at least 1 year until final maturity and be rated investment-grade (Baa3/ BBB-/BBB-) or better using the middle rating of Moody’s, S&P, and Fitch.

    Euro Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, euro-denominated, fixed rate bond market, including treasuries, government-related, corporate and securitized issues. Inclusion is based on currency denomination of a bond and not country of risk of the issuer.

    Japanese Aggregate Bond Index The Japanese Aggregate Index contains fixed-rate investment-grade securities denominated in Japanese yen and registered as domestic bonds. The index is composed primarily of local currency sovereign debt but also includes government-related, corporate, and securitized bonds.

    The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over U.S.D 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately U.S.D 3.4 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

    The DAX Index is a total return index of 30 selected German blue chip stocks traded on the Frankfurt Stock Exchange. The equities use free float shares in the index calculation. The DAX has a base value of 1,000 as of December 31, 1987. As of June 18, 1999 only XETRA equity prices are used to calculate all DAX indices.

    The STOXX 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 17 countries of the European region.

    The Nikkei 225 Index is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. The Nikkei Stock Average was first published on May 16, 1949.

    Shanghai Composite Index is a capitalization-weighted index. The index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The index was developed on December 19, 1990.

    MSCI ACWI is a free-float weighted equity index. It was developed with a base value of 100 as of December 31 1987. MXWD includes both emerging and developed world markets.

    FTSE 100 is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange. The equities use an investibility weighting in the index calculation. The index was developed with a base level of 1000 as of December 30, 1983.

    MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of volatilities on the CT2, CT5, CT10, and CT30. (weighted average of 1m2y, 1m5y, 1m10y and 1m30y Treasury implied vols with weights 0.2/0.2/0.4/0.2, respectively).

    VIX Index is a financial benchmark designed to be an up-to-the-minute market estimate of the expected volatility of the S&P 500® Index, and is calculated by using the midpoint of real-time S&P 500 Index (SPX) option bid/ask quotes.

    Bloomberg Commodity Index Bloomberg Commodity Index (BCOM) is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification. Roll period typically occurs from 6th-10th business day based on the roll schedule.

    The U.S. Dollar Index indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies.  The ICE US computes this by using the rates supplied by some 500 banks.

    2025-10140

     

    Fixed income instruments are subject to credit, market, and interest rate. Emerging market investments are subject to greater volatility and price declines.

     

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