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Monthly Review
July was defined by a broad selloff in developed-market rates as investors continued to assess the durability of growth, inflation, and restrictive monetary policy. Government bond yields rose across most major markets, while inflation expectations moved higher and U.S. curves steepened. Spread sectors were more mixed: U.S. credit widened modestly, European investment grade remained resilient, and securitized products absorbed higher rates with only limited deterioration in credit spreads.
The rates move was global. The U.S. 10-year Treasury yield rose 27 basis points (bps) to 4.73%, while 10-year yields increased 35bps in Germany, 29bps in the UK, 28bps in Canada, and 32bps in New Zealand. In the U.S., the selloff was accompanied by curve steepening, with the 2s10s spread widening 15bps and the 5s30s spread increasing 10bps. Inflation expectations also rose, with 10-year breakevens increasing 5bps in the U.S. and by roughly 17 to 20bps across several European markets. These moves reflected continued uncertainty around the path of monetary policy, particularly as positive growth data and lingering inflation risks limited the scope for near-term easing.
The Federal Reserve’s month-end meeting added to that uncertainty. The Committee left rates unchanged despite three votes in favor of a 25bps hike, creating a hawkish vote split but a more measured policy signal. Chairman Warsh emphasized the tightening already delivered by higher market yields and suggested the Fed was willing to preserve flexibility rather than lead expectations with a more forceful inflation message. Markets interpreted the reaction function as comparatively dovish: the yield curve steepened, September policy expectations repriced, and breakevens moved higher. The response suggested investors viewed the Fed as prepared to let financial conditions do part of the tightening work, while remaining less explicit about what would trigger direct policy action.
Foreign exchange markets partially reversed June’s U.S. dollar strength. The broad dollar index declined approximately 1.3%, while the yen, sterling, Norwegian krone, and New Zealand dollar appreciated. Emerging-market currency performance was highly differentiated, with notable strength in the Colombian peso and Korean won, while the Hungarian forint, Turkish lira, and Egyptian pound weakened.
Credit markets remained orderly despite higher government bond yields and historically tight valuations. U.S. investment grade spreads widened 4bps to 78bps OAS, with industrials modestly underperforming financials and utilities. Longer-duration yields moved above 6%, increasing the all-in income available from high-quality corporate credit, though elevated issuance and tight starting valuations contributed to greater investor selectivity. Euro investment grade proved more resilient, tightening 1bp to 79bps, with modest outperformance from industrials and utilities. The regional divergence reinforced the importance of market and sector selection rather than broad credit beta.
High yield experienced somewhat greater pressure. U.S. high yield spreads widened 9bps to 279bps, led by a 56bps move in CCC-rated debt, while BB and single-B spreads moved more modestly. Euro high yield widened only 3bps to 272bps, although single-B credits underperformed. Primary activity and AI-related financing remained important themes, but investors continued to distinguish sharply between established businesses offering attractive carry and more speculative data center or technology-related issuers.
Leveraged loans remained characterized by substantial dispersion. Software continued to trade at a significant discount to the broader market, reflecting persistent concerns around AI disruption, refinancing, and the transparency of private-market valuations. At the same time, stronger CLO demand created selective opportunities in higher-quality software issuers with mission-critical products, shorter maturities, and stronger switching costs. The broader theme remained one of improving opportunities beneath a market that still required disciplined issuer selection.
Securitized markets faced pressure primarily from the rise in rates rather than a meaningful deterioration in credit fundamentals. Agency Mortgage-Backed Security (MBS) yields increased 33bps to 5.75%, while spreads widened 9bps to approximately 116bps versus comparable Treasuries. Thirty-year mortgage rates rose to 6.73%. By contrast, spread movements across securitized credit remained modest: agency CMBS and AAA CMBS widened only 1bp, while AAA Asset-Backed Securities (ABS) tightened slightly. Stable housing fundamentals and improving commercial real estate occupancy continued to support underlying credit performance, although higher rates and heavy issuance constrained broader spread tightening.
Emerging markets (EM) were mixed as global yields rose and country-specific developments remained the primary source of differentiation. External sovereign spreads widened 10bps to 227bps, with the Middle East underperforming as regional risk premia remained elevated. EM corporate spreads widened only modestly, while local yields rose across many markets, including Hungary, Poland, South Africa, Mexico, Indonesia, and South Korea. Political developments and policy measures in markets such as Colombia and India continued to create idiosyncratic opportunities despite the less supportive global rates backdrop.
Overall, July marked a shift from the relative stability of June toward renewed pressure from higher global yields. Fixed income markets remained functional and technical demand continued to provide support, but the combination of rising rates, tight spreads, and growing dispersion reinforced the importance of carry, relative value, and active security selection.
Display 1: Asset Performance Year-to-Date
Note: USD-based performance. Source: Bloomberg. Data as of July 31, 2026. The indexes are provided for illustrative purposes only and are not meant to depict the performance of a specific investment. Past performance is no guarantee of future results. See below for index definitions.
Display 1: Asset Performance Year-to-Date
Display 2: Currency Monthly Changes versus USD
Note: Positive change means appreciation of the currency against the USD. Source: Bloomberg. Data as of July 31, 2026.
Display 2: Currency Monthly Changes versus USD
Display 3: Major Monthly Changes in 10-Year Yields and Spreads
Source: Bloomberg, JPMorgan. Data as of July 31, 2026
Display 3: Major Monthly Changes in 10-Year Yields and Spreads
Broad Markets Fixed Income Global Asset Allocation and Outlook
Developed Market Rate/Foreign Currency
(Long duration, neutral curve positioning, selective high-carry FX)
Our views are grounded in a macro environment where country differentiation is becoming increasingly important. In the U.S., resilient labor-market data, firm consumption, and persistent inflation pressures have led investors to reprice monetary-policy expectations toward a more restrictive path than was anticipated at the beginning of the year. Elsewhere in developed markets, much of this adjustment occurred earlier, though inflation, energy prices, fiscal dynamics, and differing growth trajectories continue to shape central-bank expectations.
Against this backdrop, we maintain a long-duration stance across developed markets, expressed selectively in regions where growth appears more vulnerable to tighter financial conditions and valuations are compelling. Exposure remains focused on short-maturity rates in Canada and New Zealand, alongside selective euro-area duration, including France. This positioning reflects the greater scope for economic weakness outside the U.S. and the potential for regional policy paths to diverge.
Inflation remains a central macro risk. Although market-implied inflation expectations have fluctuated, underlying price pressures and uncertainty around the Federal Reserve’s reaction function continue to support exposure to U.S. breakevens across intermediate and longer maturities. We continue to see value in guarding portfolios against the risk that inflation remains above target for longer than markets hedging currently anticipate.
We remain broadly neutral on directional curve exposure, while retaining selective relative-value positions where differences in policy, growth, and valuation create more attractive opportunities. These include cross-market positions within Europe and targeted curve exposure in Australia, rather than a broad global steepening or flattening view.
In foreign exchange, we continue to favor selective high-carry emerging-market currencies where fundamentals and valuations remain supportive. Our positive view is focused on the Mexican peso, funded against lower-yielding European currencies including the euro, Swiss franc, and Swedish krona. More broadly, we expect currency markets to remain sensitive to relative growth, inflation, and central-bank dynamics, with country differentiation continuing to create opportunities across both developed and emerging markets.
Emerging Market Debt
(Overweight)
Emerging market sovereign and corporate debt remains an attractive opportunity, supported by elevated real yields, resilient income generation, and improving fundamentals in select countries. However, July presented a less supportive external backdrop as developed-market yields rose sharply, EM sovereign spreads widened, and local rates came under pressure across several regions. Middle Eastern risk premia also increased amid continued geopolitical uncertainty, reinforcing the importance of regional and country differentiation.
Carry and income remain central drivers of expected returns, though country selection is increasingly important given elevated dispersion. Recent performance highlighted the value of idiosyncratic opportunities, including positive political and capital-flow developments in Colombia, alongside more challenging conditions in markets facing inflation, currency, or policy pressure. Higher energy prices also continue to create divergence between commodity exporters and importers.
Valuations remain attractive across select local- and hard-currency markets, and many EM currencies continue to offer compelling carry relative to developed markets. While higher global yields, tighter financial conditions, and persistent inflation remain important risks, we continue to favor countries with credible monetary frameworks, improving external balances, and attractive real-yield differentials. In an environment where global growth remains positive and default risks remain contained, we believe the asset class continues to offer attractive risk-adjusted return potential.
Corporate Credit
(Underweight IG, small overweight HY)
We remain underweight investment grade (IG) corporates due to tight valuations, rising government bond yields, and limited scope for broad-based spread compression. July reinforced the importance of regional differentiation: U.S. IG spreads widened modestly as higher yields and elevated issuance weighed on the market, while Euro IG remained comparatively resilient. All-in yields have become more attractive, but carry remains the principal source of expected return and tight starting spreads leave limited defense against further volatility.
Fundamentals remain solid, supported by healthy balance sheets, low downgrade risk, and generally resilient earnings. That said, the market is increasingly entering a later-cycle phase characterized by elevated M&A activity, AI- and infrastructure-related capital expenditure, and higher shareholder distributions. AI-related financing has continued to accelerate, particularly among large technology and hyperscale issuers, reinforcing expectations that infrastructure spending will remain an important driver of corporate issuance.
Regionally, we continue to prefer Europe over the U.S., supported by stronger technicals and more resilient spread performance. Within the U.S., we favor financials and utilities over industrials and lower-quality non-financial issuers, where capex, M&A activity, and shareholder distributions may create greater balance-sheet pressure. We remain particularly selective in sectors where technological disruption or speculative financing activity could weaken credit quality.
We maintain a modest overweight to select high-yield issuers in both the U.S. and Europe. While fundamentals remain broadly supportive, July’s widening was concentrated in lower-quality U.S. credit, particularly CCC-rated issuers, highlighting the limited margin for error at current valuations. We therefore continue to favor BB and higher-quality single-B credits with resilient cash flows, manageable refinancing needs, and less exposure to speculative AI- or data-center-related financing.
We continue to believe a meaningful demand-destruction scenario is not the base case. Low but positive economic growth, supported by fiscal spending, energy-related investment, and continued AI and infrastructure capex, remains consistent with a broadly benign default environment. However, with much of the good news already reflected in valuations, selectivity is increasingly important.
Elevated dispersion across sectors and issuers continues to create opportunities for active positioning. We favor businesses with resilient cash flows, strong pricing power, lower refinancing risk, and less exposure to cyclical demand pressure. While high-yield spreads leave limited margin for error, the yield per unit of spread-duration risk remains compelling relative to investment grade credit.
Leveraged Loans
(Neutral)
We maintain a neutral stance on leveraged loans as increased dispersion and prior spread widening have improved valuations across parts of the market. The asset class remains characterized by selective technicals and meaningful issuer-level differentiation, but valuations have become more attractive, particularly relative to high-yield corporates. CLO demand continues to provide an important source of support, while investor preference remains focused on higher-quality issuers and more resilient sectors.
Software and technology-linked issuers remain an area of caution given ongoing uncertainty around AI-related disruption. However, the broad-based selloff across parts of the sector has also created selective opportunities where market pricing appears disconnected from underlying fundamentals. In several cases, investors have reduced exposure indiscriminately, creating attractive entry points in higher-quality, mission-critical businesses with durable cash flows, proprietary data advantages, and high switching costs.
More broadly, economically sensitive sectors continue to face pressure from elevated financing costs, inflation uncertainty, and rising input costs, even as overall corporate fundamentals remain relatively stable. The rise in global yields and continued uncertainty around the policy outlook may extend pressure on highly leveraged borrowers, reinforcing our preference for issuers with strong interest coverage, manageable maturity profiles, and durable cash-flow generation.
CLO issuance and demand for floating-rate exposure remain supportive, helping offset more mixed retail flows. While selectivity remains paramount, current valuations provide improved, though still selective, compensation for refinancing and macroeconomic risks in higher-quality segments of the market.
Securitized Products
(Overweight)
Agency mortgage-backed securities and non-agency residential mortgage-backed securities remain a high-conviction overweight. Agency MBS came under pressure in July as government bond yields rose, the curve steepened, and mortgage rates increased. Agency MBS yields rose materially and spreads widened versus comparable Treasuries, improving relative valuations after a period of strong performance. We continue to view current-coupon agency MBS as attractive relative to other high-quality fixed income sectors, particularly given the additional yield and reduced prepayment risk associated with a higher-for-longer rate environment.
Technical conditions remain broadly supportive, although the sector is likely to remain sensitive to rates volatility. Attractive all-in yields continue to support demand from money managers, banks, and government-sponsored enterprises, while Federal Reserve balance-sheet runoff remains a source of supply. A sustained increase in rates volatility or a further sharp move in the long end would represent the principal near-term risks.
Non-agency RMBS continues to offer one of the more attractive opportunity sets within structured credit. Stable home prices, low loan-to-value ratios, improving collateral performance, and limited refinancing risk continue to support fundamentals. Strong issuance growth has been met with robust investor demand, particularly in residential credit sectors where recent vintages continue to demonstrate favorable performance characteristics.
Securitized credit proved more resilient than agency MBS during July. Spread movements in CMBS were limited, while AAA ABS tightened modestly, suggesting that the month’s weakness was driven primarily by higher rates rather than a deterioration in collateral fundamentals.
Commercial mortgage-backed securities remain an attractive area of structured credit, though selectivity remains critical. Fundamentals are resilient in higher-quality segments, and strong technical demand has continued to support the sector despite the higher-rate environment. We continue to favor exposure to hospitality, logistics, storage, and high-quality multifamily assets, where operating performance and collateral quality remain comparatively strong.
Issuance across securitized markets, including CMBS, has remained robust through the single-asset, single-borrower market, but many transactions have been well absorbed and heavily oversubscribed, reinforcing the strength of investor demand. Dispersion across property types, locations, and capital structures remains elevated, and we continue to focus on higher-quality transactions where collateral performance, borrower sponsorship, and cash-flow visibility provide stronger downside risk mitigation.
Asset-backed securities remain supported by strong demand, attractive carry, and the sector’s generally shorter-duration profile. Issuance has been robust, but demand for high-quality securitized collateral has remained resilient, helping spreads remain well contained despite elevated supply. We continue to view the sector as a useful source of diversification and income in an environment where carry is expected to be a dominant driver of returns.
We also continue to see opportunities in select non-consumer ABS where fundamentals remain stable and valuations remain attractive. We are more cautious in areas where projected supply, technology disruption, or uncertain long-term economics are not adequately reflected in spreads.
Featured Insights
Investing in companies in anticipation of a catalyst event, such as AI adoption, carries the risk that such catalysts may not occur, may be delayed, or that the market may react differently than expected. Companies focused on AI may have limited product lines, markets or financial resources, and their management and performance may be particularly impacted by events that adversely affect AI adoption, such as rapid changes in product technology cycles, product obsolescence, government regulation, cybersecurity concerns and competition.
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