The Big Idea

Scenarios: The Fed, tech and the fading influence of war

| June 26, 2026

This material is a Marketing Communication and does not constitute Independent Investment Research.

June has become a pivotal month for debt markets with the new Warsh Fed showing up hawkish and with the US and Iran trying to put outright war behind them. And while tech capital investment has already had a big influence on credit markets, it seems likely it could expand its role in driving broader growth and inflation.

Leading influences

A handful of issues come through in client discussions as the leading influences on current portfolio manager thinking:

  • Federal Reserve leadership and transition. The debut this month of the new Warsh Fed surprised the market with its hawkishness. As my colleague Stephen Stanley points out, more hawkish dots, committee projections of higher inflation in 2027 and a newly clear emphasis on hitting the 2% Fed inflation target points to a Fed ready to hike. Stephen sees hikes in September and December, and the Fed on hold next year. More broadly, Warsh’s emphasis on inflation echoes the orthodoxy of the central bank before the Global Financial Crisis. If the old orthodoxy is now the new orthodoxy, the Fed will need to keep fed funds well above anticipated rates of inflation to ultimately push inflation back to 2%. That also points to fed funds above 4% for a while.
  • Tech capital investment. Tremendous capital investment in technology has put supply pressure on the debt markets since last late last year, but it is also bleeding into discussions of economic growth and inflation. Capital investment in technology was responsible for all of net growth in GDP in the last quarter of 2025 and remains a material part of the ongoing GDP growth story. It also could become the new new source of inflationary pressure, pushing up the cost of electricity, water, CPUs and GPUs and other components needed to build data centers. This could keep inflation elevated even after the effects of tariffs and oil fade.
  • US-Iran and oil. Although this issue dominated markets from March until mid-June, it looks likely to recede rapidly into the rearview mirror. The US seems eager to get this story out of the headlines, and the oil spot and futures market seem to see it the same way. The price for a barrel of Brent crude now trades just above the mark in the days before the war. The market may flare up as Iran flexes its newfound muscle in the Strait of Hormuz, but for practical purposes the debt markets see this thing as over.
  • #4 Other influences. These play a smaller role than the others for now, but they have potential to break through:
  • The slow run on the bank of private credit continues, with more news in the last week of redemptions from a range of private debt funds. The funds’ 5% limits on redemptions are keeping the funds intact and should continue to do that through 2027, which looks at least as long as the run will continue. Most funds are heavily capitalized and should survive, but borrowers from those funds are likely to see their access to liquidity squeezed in 2027. For those borrowers, things are likely to get worse before they get better.
  • The average US consumer is strong, but the consumer in the bottom 20% of the income distribution is not. That consumer is seeing inflation eat away at real buying power and is seeing a range of federal programs, such as food and healthcare subsidies, roll back. Among other places, the weakness shows up in the high rates of delinquency in mortgages insured by the Federal Housing Administration. The pressure on these households is not over.

These influences suggest a few scenarios for debt markets.

Scenarios

Reliable stability (50%)

Rates hold in a narrow range in this base case with spreads slowly tightening. Carry and spread duration consequently feed portfolio returns. Risk assets outperform by generating more income and repricing to tighter spreads. But heavy supply leaves excess returns on technology debt lagging every other risk asset even though technology fundamentals remain solid.

This scenario relies on a steady Fed after a hike or two this year and on inflation that seems at least tame after the effects of tariffs and oil wear off. This also assumes that US-Iran find their way to a new status quo. Rates on the US 10-year notes should range between 4.25% and 4.75%. Option-adjusted spreads on the investment grade corporate index range between 70 bp and 75 bp, and on the agency MBS index between 20 bp and 25 bp.

Bearish inflation (30%)

Rates rise in this scenario with the 2-year note above 4.25% and the 10-year ranging around 4.75%. Spreads on risk assets widen only slightly. Short duration wins, and risk assets throw off enough carry to outweigh slightly wider spreads.

This scenario assumes inflation keeps running well above the Fed’s 2% target even after the effects of tariffs and oil fade. This also assumes growth comes in more robust than expected due, in part, to an ongoing heavy technology spend. Inflation forces the Fed to tighten further, and growth keeps risk spreads largely intact. Excess returns on technology continue to lag other risk assets.

Bullish return to target (20%)

Rates drop here with the 2-year note below 3.75% and the 10-year below 4.25%. Spreads on credit widen in this scenario. Duration wins. Risk underperforms.

This one assumes the Fed hikes expected later this year have their intended effect. The inflation impact of tariffs and oil fade by late 2026 or early 2027, higher fed funds prove restrictive even with tech investment running hot and inflation begins gliding toward target.

Positioning

Risk assets do well across most of the probability space, and keeping duration short does well, too. Technology looks likely to lag across most of the space.

* * *

The view in rates

The market for now has concluded that the Fed will start hiking within the next seven months, pushing rates up and flattening the yield curve. The very front end of the curve is probably stuck at a floor of 4.00% or higher through 2026 depending on US-Iran and expected short-term inflation. The 10-year note continues to look like it will spend more time above 4.40% than below it for the balance of the year. A lasting and stable agreement between the US and Iran could take 10-year yields reliably below 4.40%.

Key market levels:

  • Setting on 3-month term SOFR traded Friday at 374 bp
  • Further out the curve, the 2-year note traded Friday at 4.09. The 10-year note traded at 4.37%.
  • The Treasury yield curve traded Friday with 2s10s at 28 bp and with 5s30s at 74 bp
  • Breakeven 10-year inflation traded Friday at 220 bp with 5-year forward 5-year breakeven at 217 bp, still signaling confidence that the Fed target still holds. The 10-year real rate finished the week at 216 bp.

The view in spreads

The supply and demand balance looks neutral for MBS, a little less so for corporate debt and particularly weak for technology debt. MBS net supply continues to run very low while Fannie Mae and Freddie Mac continue 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 capital investment and the current AI buildout. MBS spreads should be able to hold their ground in most circumstances, most credit should continue slowly tightening and technology spreads look likely to lag both.

The Bloomberg US investment grade corporate bond index OAS traded on Friday at 75 bp. Nominal par 30-year MBS spreads to the blend of 5- and 10-year Treasury yields traded Friday at 108 bp. Par 30-year MBS TOAS closed Friday at 17 bp.

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.

Steven Abrahams
steven.abrahams@santander.us
1 (646) 776-7864

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