Macro
- Economic growth remains strong in the United States. We expect 2026 real GDP growth to come in at 2.5% (based on our Global Investment Management Survey). That is above the Bloomberg consensus of 2.2% and the 2.3% median response from the Federal Reserve’s (Fed’s) most recent Summary of Economic Projections (SEP). The Atlanta Fed’s volatile GDPNow (“nowcasting” model) projects 3.6% GDP growth in the third quarter (Q3).
- The consumer remains resilient. We heard it on earnings calls this week from a number of big banks—the broad message was that the consumer is healthy and supported by a strong labor market, even amid higher gas prices in Q3. Retail sales for September increased 0.8% month-over-month, versus market expectations of 0.3%.
- Initial jobless claims, reported on Thursday, came in slightly below expectations and the four-week average remains below 200,000. This data supports our belief that the labor market remains strong. The September unemployment rate (reported on October 2) was 4.2%.
- Inflation remains hot. Two reports this week came in above expectations. The headline Consumer Price Index (CPI) rose 0.6% in September, an increase from 0.4% in August, and 3.7% year-on-year. The core (excluding food and energy) rose 0.3% and 2.6% annually vs. expectations of 0.2% and 2.5%, respectively. Producer Price Index (PPI) final demand rose 1.3% month-on-month, its largest increase since March of 2022. The core PPI rose 0.7% vs. 0.3% expected, the largest in four years.
- Yields and breakevens spiked following the CPI report. The two-year Treasury yield rose nearly 20 basis points (bps) to 4.95% and the 10-year rose about 13 bps to 5.33%. Between the CPI report and Thursday afternoon, the yield curve has bull-flattened with yields moving lower led by the 10-year, with the yield at 5.08% at the time of this writing. Hot CPI and hot PPI—and yields moved lower?
- Fed rate-hike expectations initially also spiked after the CPI report. Fed funds futures implied a 50/50 chance of an October rate hike immediately after the report, but since then, odds have moved back down to 27%. The market expects three rate hikes between now and December 2027, versus 3.5 hikes immediately after the report. What explains this reaction, despite hot inflation and brent crude oil still trading at $106 a barrel? The answer may lie within equities. Strong capex related to artificial intelligence (AI) has helped drive strong growth in the United States. It has also likely played a role in pushing inflation, and inflation expectations, higher.
- Tech companies have increasingly issued debt to fund their spending plans. Each of these factors may have helped push rates higher over the past year. Changes in the AI spending narrative, even small ones, may have repercussions in the bond market.
See more: Hedge Fund Strategy Outlook: Fourth Quarter 2026
Fixed Income
- The major story in fixed income this week was the roller-coaster move in Treasuries. The initial selloff after the CPI report Wednesday was short-lived as the tech rout and questions about AI capex contributed to a rally by the end of day Thursday. Ten-year yields moved 15 bps lower this week as of Thursday and currently sit at 5.08%. Our expected range for the 10-year Treasury yield by year-end is 5.0% – 5.5%, based on our survey.
- The primary theme from this newsletter this year as it pertains to duration has been to favor ultrashort and short duration mandates. While we believe that short duration should remain an important structural component of bond portfolios, the move higher in rates has made intermediate- and core/core-plus strategies relatively attractive. We maintain that moves higher in yields can be met with dollar-cost averaging into these areas. For those investors looking for tax-loss harvesting opportunities prior to year end, in our view, fixed income is the area to look. Consider upgrading positions where appropriate.
- Within corporate credit, spreads have widened over the past month, especially in high-yield. The Bloomberg US Agg Corporate option-adjusted-spread (OAS) has increased 8 bps since September 18 and sits at 83 bps today. The Bloomberg US Corporate High-Yield OAS increased 60 bps over the same time frame and currently sits at 324 bps, above its five-year median OAS of 312 bps. Much of the spread movement in high-yield has come from the lowest rung of the index. Given high starting yields and stable fundamentals, we still find upper quality high-yield bonds to be attractive.
- We remain bullish on municipal bonds. Fundamentals remain strong and yields on a tax-equivalent basis are attractive. We believe municipal bonds can serve as a diversifier within portfolios due to their relatively low correlation to both equities and other areas of fixed income.
Sentiment
- Investor sentiment, as evidenced by the latest AAII survey, fell slightly this week. The data released on October 15 shows 39% of respondents were bullish, down from 40% last week. Bearish respondents increased to 42%, up from 39% last week. Neither reading shows signs of excess or capitulation.
We will continue to analyze the markets and offer insights again next week.
Source of data (except where noted) is Bloomberg, FactSet and Franklin Templeton Institute, as of October 15, 2026. Important data provider notices and terms are available at www.franklintempletondatasources.com.
The Franklin Templeton Institute Global Investment Management Survey is a biannual outlook survey designed to give a view across our investment teams. The Franklin Templeton Institute identifies the median across the survey answers and develops the outlook. The survey received responses from around 200 portfolio managers, directors of research and chief investment officers, representing participation across equity, private equity, fixed income, private debt, real estate, digital assets, hedge funds and secondary private markets. Each of our investment teams is independent and has its own views.
Glossary of Terms
The AAII (American Association of Individual Investors) Sentiment Survey: This survey offers insight into the opinions of individual investors by asking them their thoughts on where the market is heading in the next six months.
Breakeven rates: The difference between yields of Treasury bonds and TIPS for issues of the same tenor/maturity, calculated by subtracting TIPS yields from Treasuries; a measure of inflation.
Capital expenditure (capex): Funds that companies spend to acquire, upgrade or maintain physical assets, such as buildings, technology or equipment, with the purpose of maintaining or growing future operations.
Dollar-cost averaging: An investment strategy wherein a fixed amount of money is invested at regular intervals, regardless of the market's price. Periodic investment plans do not ensure a profit and do not protect against investment loss in declining markets. Since dollar-cost averaging involves continuous investment in securities regardless of fluctuating price levels of such securities, an investor should consider his/her financial ability to continue purchasing through periods of low price levels.
Duration: A measure of how much a bond’s price changes relative to changes in interest rates.
Earnings per share (EPS): The portion of a company's profit allocated to each outstanding share of common stock. An index EPS is an aggregation of the EPS of its component companies.
Fed funds (FF) rate: The interest rate that depository institutions such as banks charge other institutions for holding overnight reserves.
Option-adjusted spread (OAS): Measures the spread between a bond's interest rate and the risk-free rate, while adjusting for any embedded options like callable or mortgage-backed securities.
Price/earnings (P/E): A ratio calculated by dividing a company’s share price by its earnings per share, a measure of valuation.
Tax-loss harvesting: A strategy of selling securities at a loss to offset capital gains and reduce an investor’s taxable income.
Taxable-equivalent yield: The yield of a municipal bond investment calculated to reflect the benefits of income tax exemption and to be comparable to the yield of a taxable bond.
Yield spreads/tights: Spreads are the difference between yields on differing debt instruments of varying maturities, credit ratings, issuers or risk levels. “Tight” in reference to spreads indicates small differences in yields.
Indexes Referenced
The Bloomberg US Agg Corporate Index: A broad‐based flagship benchmark for the US investment‐grade, fixed‐rate, taxable bond market.
The Bloomberg US Corporate High-Yield Index: Measures the performance of USD‐denominated, high‐yield, fixed‐rate corporate bonds in the US market.
Nasdaq 100 Index: Tracks 100 of the largest non‐financial companies listed on the Nasdaq Stock Market.
Philadelphia Semiconductor Index (SOX): The SOX is designed to track the performance of a set of companies engaged in the design, distribution, manufacture, and sale of semiconductors. It currently contains 30 securities.
Korean Composite Stock Exchange Index (KOSPI): South Korea’s primary stock market index, the KOSPI tracks the performance of the 200 largest companies listed on the Korean Exchange.
Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator of future results.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce desired results.
Diversification does not guarantee a profit or protect against a loss.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
The investment style may become out of favor, which may have a negative impact on performance.
Large-capitalization companies may fall out of favor with investors based on market and economic conditions.
Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
Important Information
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
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Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
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