Hello and welcome back to The Weekly Fix. My name is Mindy Gudmundson, and I am an Institutional Portfolio Manager with RBC’s BlueBay Fixed Income team in Minneapolis MN. Today I'd like to walk you through what's happening in the US fixed income market against a backdrop of significant economic headwinds and geopolitical tension.

We entered 2026 with optimistic assumptions about growth and inflation. That rosy outlook has changed materially. The Middle East conflict and Strait of Hormuz disruption have created a classic stagflationary supply shock—one that differs fundamentally from 2022’s energy shock. Back then, demand was strong, policy was stimulative, and rates sat at zero. Today, we face tighter monetary conditions, a restrictive policy stance, and an economy that was already settling into a more moderate growth trajectory. Last week's stock market rally to record highs, prompted by breakthrough talks on reopening the Strait of Hormuz, appears premature. The economic reality is grimmer than it was at the start of the year, with monetary policy now tilted toward greater restriction—a headwind that the recent equity surge fails to adequately reflect.

So, what does this mean for inflation and growth? Here's what we're projecting: US headline CPI will likely reach 4%, driven by elevated energy prices rippling through gasoline, food, and transportation costs. Core inflation will be roughly 0.5% lower, but the headline number matters for markets and policy. Meanwhile, economic growth will slow by more than 0.5%. Our baseline now sees the US expanding above 2%, which is healthy, but materially below where we stood weeks ago. The risk of recession remains material if geopolitical tensions escalate further. Consumer sentiment also hit an all-time low, reflecting broad concern over high prices and declining asset values.

Here's where it gets interesting for bond investors. We do not hold a strong directional view on US Treasuries at this moment. However, what we do see is opportunity in the shape of the yield curve. As inflation pressures peak and growth concerns mount, we expect conditions to favor curve steepening. Short rates should peak once inflation reaches its apex; long rates face ongoing pressure from fiscal concerns and growth anxiety.

The timing matters, though. We anticipate upside inflation surprises over the coming weeks, underscoring the need for patience.

US fixed income markets are pricing in a more challenging environment than they were at the start of the year. Central banks will likely turn more hawkish as inflation data arrives. That shift in monetary policy rhetoric—not geopolitics—will ultimately determine fixed income direction.

Opportunity lies ahead, but only for disciplined investors willing to wait for clarity on the inflation peak. We'll continue monitoring these developments closely and will update our views as data evolves. And speaking of data, the next week is absolutely packed with releases: Retail Sales, Jobs data, heavy corporate earnings, and then GDP to close the month. This should tell us whether the macro data validates the equity rally or reveals an economy already softening before energy prices spiked. Thanks for joining us today and have a great week!