The Big Idea
Notes on debt demand, notes on supply
This material is a Marketing Communication and does not constitute Independent Investment Research.
Inflows to ETFs and mutual funds have helped soak up fixed income supply for most of the last year, but the momentum has at least temporarily faded. After a strong run from last May through this February, inflows have sharply declined. ETFs in April saw the lowest inflows in a year, and mutual funds saw net redemptions. The shifting momentum has likely cooled the sector’s bid for risk assets broadly and increased mutual fund demand for liquidity—a plus for stronger, shorter and more liquid instruments. Offsetting some of this is continued heavy net supply of Treasury debt.
A drop in inflows to ETFs and mutual funds cools the total return bid
ETFs inflows from April 1 through April 22 dropped to $20 billion, the lowest 4-week tally since the aftermath of Liberation Day in April 2025 (Exhibit 1). For context, ETF inflows peaked in February at $69 billion. Mutual funds in April saw net outflows of nearly $15 billion, also the worst month for mutual fund flows since April 2025. Mutual fund inflows peaked in January at $37 billion.
Exhibit 1: ETFs saw inflows drop in April, mutual funds saw net redemptions
Source: ICI, Santander US Capital Markets
The change in appetite follows poor fixed income returns in March and April. The Bloomberg US Aggregate Index lost 1.76% in March and delivered 0.0% returns in April. Poor returns often trigger redemptions by retail investors, with the heavy retail exposure of mutual funds leaving them more vulnerable than ETFs.
The good prospects for uneasy stability in US debt markets should help debt portfolios post better returns in May and beyond, mainly as carry drives the numbers. Although better returns should draw investors back to both ETFs and mutual funds—flows into mutual funds already turning positive in late April—the memory of net redemptions is likely to keep mutual fund managers biased toward more liquid assets or holding more cash or both. That should favor government and agency debt and MBS and highly rated corporate debt with shorter duration.
Continued heavy net supply of Treasury debt
Meanwhile, continued heavy net supply of Treasury debt is helping compress the spread of risk assets to the Treasury curve. The par balance of the Treasury market index has increased by an average of $100 billion a month over the last 12 months compared to $30 billion for the investment grade corporate index and $1 billion for the agency MBS index (Exhibit 2). Averages can hide volatility, although that has been limited in net monthly growth in Treasury debt and MBS but highly variable in corporate debt. In April, for example, the Treasury index grew by $92 billion, the corporate index by $2 billion and the MBS index by $5 billion.
Exhibit 2: Index Treasury debt outstanding is far outstripping corporate, MBS
Source: Bloomberg, Santander US Capital Markets
Absent changes in the fundamental risks in corporate debt and MBS or significant shifts in demand, the heavy Treasury supply should raise yields in Treasury debt relative to risk assets. The trend continues to argue for heavy core allocations to risk.
* * *
The view in rates
An uneasy stability continues to shape all markets, including rates, although conditions leaned bearishly toward stagflation in the last week. The continuing standoff in US-Iran and the risk of damage to oil production capacity could continue pushing oil prices and rates higher. The April Fed meeting also showed a growing split that could make US monetary policy more volatile than it has been in the past. Meanwhile, steady inflation and a resilient economy and labor market leave the Fed with little if any room to move rates lower this year. The front end of the curve is probably stuck at a floor of 3.65% or higher depending on US-Iran and expected short-term inflation. The 10-year note continues to look like it will spend more time above 4.25% than below it for the balance of the year.
Key market levels:
- Setting on 3-month term SOFR traded Friday at 365 bp, down 2 bp in the last week after staying unchanged for the seven weeks before
- Further out the curve, the 2-year note traded Friday at 3.89, up by 12 bp over a week. The 10-year note traded at 4.39%, up by 9 bp.
- The Treasury yield curve traded Friday with 2s10s at 49 bp, flatter by 4 bp over the last week, with 5s30s at 94 bp, flatter by 6 bp
- Breakeven 10-year inflation traded Friday at 243 bp, up by 7 bp over the last week, with 5-year forward 5-year breakeven at 225 bp, up by 5 bp over the last week but still signaling confidence that the Fed target still holds. The 10-year real rate finished the week at 187 bp, down 2 bp on the week.
The view in spreads
Spreads should slowly tighten if the current uneasy stability continues, or tighten faster if resolution to US-Iran triggers a bullish breakthrough. Technicals are constructive for MBS although a little less so for corporate debt. MBS net supply continues to run very low with Fannie Mae and Freddie Mac continuing to add to their mortgage portfolios. Insurers continue to issue annuities and buy corporate and structured credit, but credit is facing significant needs to finance the current AI buildout. MBS spreads should be able to hold their ground in most circumstances, but credit spreads look soft depending on the volume of net issuance.
The Bloomberg US investment grade corporate bond index OAS traded on Friday at 78 bp, unchanged on the week. Nominal par 30-year MBS spreads to the blend of 5- and 10-year Treasury yields traded Friday at 115 bp, wider by 6 bp on an uptick in rate volatility. Par 30-year MBS TOAS closed Friday at 19 bp, wider by 3 bp on the week.
The view in credit
Haves and have nots continue. Big companies have healthier balance sheets than smaller companies. Consumers at the middle-to-higher end of the income distribution also have liquidity and wealth. Bank lending to non-bank financial institutions, including private debt funds and business development companies continues to expand. Bank regulators continue to focus on that category of lending, which could eventually tighten the private credit markets. But for now, credit metrics for NBFI lending are strong relative to traditional bank lending such as C&I.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2026 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
