Macro
- Our real gross domestic product (GDP) forecast for 2026 is 2.5% (based on our Global Investment Management Survey) versus the Federal Reserve’s (Fed's) forecast of 2.2% and the Wall Street consensus of around 2%. The economy remains resilient and the consumer is strong. The only thing that could throw us a curveball would be a policy mistake by the Fed. We do not anticipate that. I hesitate to even mention this because the data whips around so fast I don’t glean much from it, but the latest Atlanta Fed GDPNow forecast sits at 4%.
- Next week we have a handful of economic data points. The core Personal Consumption Expenditures (PCE) price index is probably the most important for markets, followed by jobless claims. All eyes are on Jackson Hole, Wyoming, as the Fed meets there for its economic symposium August 27-29.
- Our core PCE forecast for the year is 3.0%–3.5%; the June reading was 3.3%.
- The two-year Treasury note yield stands at 4.19%, still about 50 basis points (bps) over the federal funds rate, but off the boil. Remember, the bond market leads the Fed, not the other way around.
- US Treasury Secretary Scott Bessent seems to have brought back “Operation Twist” with the move to buy long bonds last week. The nominal dollar amount is not significant (US$2 billion), but this could be a signaling event for markets. As our Head of Research Larry Hathaway noted to us, the risk is that the peashooter becomes a bazooka. Our Senior Market Strategist Rick Polsinello also notes that the additional US$2 billion will begin in early September and continue for months to “improve liquidity”—Bessent’s words, not Rick’s.
- Breakeven rates have moved higher. One-year breakeven rates are 1.85%, up 20 bps on the week. Two-year breakeven rates are 2.25%, up 13 bps on the week, and five-year breakeven rates are 2.30%, up 8 bps. These numbers represent the bond markets’ pricing of annualized inflation out one, two, and five years. Breakevens are still at odds with the message from two-year yields, but they are beginning to converge higher. This data can and does change very quickly. As I have said many times before, I am not sure how to rectify these seemingly opposite signals. Two-year notes say hike rates while breakeven rates say maybe not.
- Meanwhile, the fed funds futures market is indicating there is a 35% chance of a 25-bps hike in September and a 38% chance of a hike in December. This data moves very fast, so this picture can and will change quickly depending on incoming data.
- On the currency front, we are expecting the US dollar to be essentially flat for the year despite the recent volatility. The US Dollar Index is trading at 98.76, lower following the “Operation Twist” announcement but still firmly rangebound as it has been for the past 17 months.
See more: It Won’t Take Much to Burst the Stock Market Bubble
Fixed Income
- We expect the 10-year US Treasury bond to yield in the range of 4.25%–4.75% for the year. As of this writing, the last trade was 4.68%. We think adding duration risk makes sense around 4.75% or so. Polsinello tells us that core and core plus strategies should get closer looks, should rates remain elevated.
- The US yield curve is flat on the week. The two-year/10-year spread is now 50 bps, unchanged from last week.
- We expect short duration fixed income mandates and corporate credit to outperform cash again this year. Considering our views on US 10-year yields, we do not expect duration to be a significant driver of total return this year. Rather, all-in yield capture seems to be the play, although recent spread widening might create an opportunity for additional total return. Clipping coupons looks attractive.
- Credit spreads remain well behaved in the face of higher yields. Investment-grade spreads, as proxied by the Bloomberg US Corporate 1-3 Year Option-Adjusted Spread (OAS), are now 46 bps over comparable Treasuries. Investment-grade spreads are still only a few basis points from five-year tights. High-yield spreads, as proxied by the Bloomberg US Corporate HY OAS, are now 270 bps over. These are both relatively tight levels from a historical perspective, reflecting a strong fundamental backdrop with corporate profitability being the main driver.
- We are bullish on municipal bonds and find taxable equivalent yields to be attractive, along with robust fundamentals. Importantly, municipal bonds can offer potential diversification benefits in the form of low correlations to various equity markets, relative to most taxable fixed income mandates. The market is on pace for another year of record supply; however, tight spreads in taxable bonds have helped the markets absorb these high supply levels.
Sentiment
- The percentage of bullish investors in the latest AAII survey (the week ending August 19) is 36%, a low reading. The percentage of bearish investors in the AAII survey is 40%. The wall of worry is still in place.
- Bull markets peak on euphoria. I don’t think we are there yet.
I will continue to analyze the markets and will offer insights again next week.
Source of data (except where noted) is Bloomberg and Franklin Templeton Institute, as of August 20, 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.
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.
EBIT: Earnings before interest and taxes.
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.
Tape: A reference to broad market performance, based on the ticker tape that transmitted stock prices during the 19th and 20th centuries.
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. “Tights” in reference to spreads indicates small differences in yields.
Indexes
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.
Bloomberg US Corporate High Yield Index: Tracks the performance of the USD-denominated, high-yield, fixed-rate corporate bond market.
Russell 2000® Index: A market capitalization-weighted index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index.
S&P 500® Index: A market capitalization-weighted index of 500 stocks, a measure of broad US equity market performance.
S&P 500 Equal Weight Index: The equal-weight version of the S&P 500 Index. The index includes the same constituents as the capitalization weighted S&P 500, but each company is allocated a fixed weight, or 0.2% of the index total, at each quarterly rebalance.
S&P MidCap 400® Index: A market capitalization-weighted index of 400 stocks of mid-size companies, distinct from the large-cap S&P 500.
US Dollar Index: A basket of six foreign currencies (euro, Japanese yen, UK pound sterling, Canadian dollar, Swedish krona and Swiss franc) used to track the relative strength of the US dollar, with a higher index value representing US dollar strength.
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