Fixed Income

Weekly View from the Desk

October 20, 2025

IMF Meetings Weigh in on U.S. Exceptionalism

    Macro

    • Our attendance at last week’s IMF/World Bank meetings left us with a few prominent themes, including the continuation of U.S. exceptionalism—accompanied by the attendant policy risks—and U.S.-induced trade tensions with their uncertain long-term effects. The crosscurrents underlying these themes include divergent scenarios priced by short-term rates and equity prices as well as the decoupling between capex and labor.
    • The focus on the U.S. centered on its economic resilience, potential fiscal boost, and unmatched market depth. It was also noted that the U.S. fiscal deficit could become increasingly unwieldy without significant tariff revenues, yet there was a conspicuous lack of discussion regarding the partial shutdown of the Federal government.
    • We also noticed increased interest in emerging market assets as a compliment—not as an alternative—to U.S. assets. There was some interest in Japanese assets and some concerns pertaining to growth in the euro area.
    • In terms of the U.S.-China relationship, trade tensions will likely remain with occasional flare ups as negotiation levers are calibrated, e.g. China’s recent restrictions on rare earths exports. Elsewhere, the fiscal picture across emerging markets differs, but local markets are offering expanded financing options.
    • Away from the IMF/WB meetings, fears surrounding regional banks, borrower’s creditworthiness, and stretched equities introduced some market volatility. We still believe the macro backdrop is consistent with our “muddle through” base case in which non-recessionary Fed policy cuts support both bonds and risky assets. High all-in yields remain compelling and could become more so if credit spreads widen from here. At this point, however, we continue to aim for carry rather than major spread compression.                  

    Developed Market Rates

    • Last week’s regional bank/credit concerns were enough to push the U.S. 10-year yield to less than 4% for the first time in 2025. While the Federal government remains partially closed, the September CPI report is due to be released on Friday due to cost-of-living adjustments on social security. The core reading is expected to show an increase of 0.3% MoM, while the headline reading is expected at 0.4%. 
    • In MBS, spreads continue to tighten, the Street still appears to be long production and higher coupons, while apparently being unable to replace inventory of lower 30-year coupons.         

    IG Corporates

    • In the U.S., IG corporate spreads tightened by 1 bp to 78 amidst slightly elevated volatility last week. This compares to local tights of 72 and a recent wide of 79 (October 10th). Issuance totaled $24B last week, with roughly 90% issued by major banks. Deals were 3.4x oversubscribed and came with a 3.1 bp concession (on average).  
    • Spreads for money center banks were unchanged due to heavy issuance. Meanwhile, regional banks were 3-7 bps wider (on average), with concerns at Zion's Bank and Western Alliance over potential loan losses. Non-financial sectors were 2-4 bps tighter. However, Oracle was the exception, widening 5-7 bps due to uncertainty regarding CapEx plans for AI infrastructure.
    • Q3 earnings season kicked off last week. In financials, net interest income for money center banks was very strong—driven by investment banking and trading businesses, and strong capital/liquidity. In addition, the asset quality of loan portfolios of the big banks was healthy, with some reducing their reserves for losses. Expectations are for 8.5% of earnings growth.
    • Business Development Company spreads (BDCs) were 10 bps tighter vs. October 10th wides, but remain 25 bps wider than the recent tights. Risks include lower rates affecting loan earnings, possible dividend cuts, asset quality issues, and increased competition. 
    • Euro IG credit spreads widened amid credit concerns (largely US$) as well as the ongoing French political crisis. Despite wider spreads, the street reportedly saw little in the way of selling-partly due to another week of positive net flows into the € IG market. 
    • Last Monday's widening in French spreads was quickly retraced as newly reappointed French PM Lecornu broke the political impasse by agreeing to suspend pension reform in exchange for the support of the Socialists. This reduced the likelihood of new parliamentary elections in the coming months. The OAT-Bund spread subsequently narrowed by 8 bps to end the week at +76 bps compared to the recent wides of +88 bps. In addition, the € IG market rallied with French Banks outperforming.
    • We maintain our positive short-term view and long-term carry positioning. Looking ahead, potential risks include changes in supply/demand technicals, single-name credit issues, and signs of tighter lending conditions. 

    Leveraged Finance

    • U.S. HY bond spreads showed resilience-only widening moderately—against regional bank concerns, renewed trade uncertainties, and the U.S. government shutdown. All credit tiers produced positive returns, with BBs outperforming Bs and CCCs. Industry performance was mostly positive, with consumer products, home builders & materials, and gaming gaining the most, while paper (the only negative performer), energy, and containers were the softest. 
    • Retail fund flows reversed course last week, with $1.3B flowing out of the asset class. Nonetheless, YTD flows of $17.2B are ahead of the $16.7B of inflows during the same period last year. Primary market activity slowed, with only $5.9B across three deals coming to market. Meanwhile, the forward calendar is light, with only three deals totaling $2.9B in the pipeline.
    • U.S. loans softened last week as investors contemplated issuer-friendly monetary policy, idiosyncratic credit issues, resurfacing trade tensions, and the U.S. government shutdown. As such, only 21% of U.S. loans were trading at or above par. While last week's retail fund outflow of $1.3B was the asset classes' first withdrawal since April, CLO formation continued, albeit at a slower pace. Meanwhile, only $8.8B across 11 primary market transactions priced. 
    • European HY bonds were stable, with BBs and Bs steady but CCCs widening, while loans were marginally wider. The primary market remained active—€4B in HY bonds and €3B in loans coming to market over the past two weeks.  

    Emerging Markets

    • EM hard currency spreads tightened modestly last week, with outperformance in CCCs and distressed/defaulted credits. Outperformers were Lebanon, Ukraine, Venezuela, and Ecuador. Argentina underperformed despite the announcement of $20B in private sector support in addition to the $20B in U.S support. The midterms take place on October 26 and investors are waiting to see if Milei can garner enough support to continue with reforms. Amid year-to-date spread tightening and an uncertain U.S. policy backdrop, we remain somewhat cautious. If the broader narrative remains supportive (i.e., growth, rates, U.S. dollar), performance is likely to remain strong, but risks remain. Balancing these risks with attractive idiosyncratic stories and select relative value opportunities, it seems appropriate to continue with risk and focus on identifying bottom-up stories. 
    • EMFX gained last week, with Europe and LatAm outperforming. Some USD selling occurred last week on the back of new trade tensions with China. Top performers last week included COP, PEN and INR. Some of the laggards included low carry currencies in Asia, such as TWD and THB. We continue to have a small, short USD bias and a heavy focus on relative value. We think this multi-month consolidation or range-bound action in USD is likely to resolve with another steady down leg for USD as the Fed does more cuts amidst a weak labor market.
    • In EM local rates, Index yields declined modestly in line with U.S. Treasury yields. Indonesia and Romania outperformed while Turkey was the largest underperformer. In the five-year swap space, yields in South Africa, Brazil, and Chile were lower. EM corporate spreads widened slightly, with high yield underperforming on weaker oil and broader concerns on credit risk. Brazil corps rallied, with Raizen rallying 5-10 points and Brasken slightly higher. New World bonds continued to bounce on speculation of a liability management exercise, and Telefonica Chile was higher with Millicom now in the race to acquire the company.   

    Securitized Products

    • Primary SASB floating-rate AAAs priced tighter in a 135-140 range while fixed rates tightened as much as 30 bps. Subordinate SASB tranches were mixed. AAA conduits and CRE CLO spreads were both unchanged, although subordinate conduit tranches stabilized at wider levels. Three transactions priced-all SASB, totaling $2.1B. Meanwhile, the SASB pipeline remains robust and the uptick in CRE CLO issuance continues on tightening spreads.
    • In RMBS, non-QM spreads widened on heavy new supply and are expected to remain pressured under a packed pipeline. Second-lien spreads were in-line with non-QMs, while CRTs were range-bound in light volumes. Eleven primary deals totaling $4.3B priced, with non-QMs' $1.7B of across four deals and second-liens' $1.3B across three transactions accounting for the bulk of the volume.
    • Benchmark AAA U.S. CLO spreads continued to tighten, while mezzanine tranches were mixed as the benchmark vs. non-benchmark basis widened. Investors are becoming increasingly focused on underlying credit fundamentals. Primary issuance was $13.5B across 29 deals in the U.S. and €4.1B priced across nine deals in Europe. The U.S. saw 14 resets, 10 new issues, and five refi's, while Europe saw five new issues and four resets. We expect gross issuance to remain elevated near-term in the U.S. and Europe.
    • ABS spreads were mixed-unchanged at the top of the stack, but wider at the bottom, especially among non-prime sectors. Primary order books have been weaker, with mixed pricing results relative to guidance. While primary market activity was light last week due the securitized conference in Miami, the pipeline is gaining momentum.

    Municipal Bonds

    • In tax-exempt munis, the 2s30s curve has flattened significantly, outperforming the taxable curve. That stated, tax-exempt performance still lags other asset classes (e.g., IG corporates and Treasuries). The 5-year, 10-year, and 30-year M/T yield ratios ended last week at 65%, 69%, and 90%.  
    • Inflows totaled $678M last week, driven by ETFs. While new deals have been well absorbed at the long end, the front end is lagging. The market has managed to take down heavy supply recently, but continued strong flows and stable Treasury rates are needed for further muni outperformance. 
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