Fixed Income

Weekly View from the Desk

October 20, 2025

IMF Meetings Weigh in on U.S. Exceptionalism

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    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. 
    Topics
    • Markets & Economy
    • Geopolitics

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

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