Taxable Bond Snapshot September 2026

Key Takeaways:

  • Yields moved significantly higher across the curve in September, as the Federal Open Market Committee (FOMC) delivered a rate hike for the first time since 2023. Brent oil prices moved back over $100/barrel as hostilities in Iran worsened, which also put pressure on bond yields.
  • The Federal Reserve’s “dot plot” suggests another potential rate increase before year-end, while markets are pricing in the possibility of two to three additional hikes next year.
  • Spread product widened versus Treasuries, with most sectors generating negative excess returns. The Bloomberg Aggregate Index returned -2.61% in September, its worst monthly performance in four years.

TAXABLE BOND MARKET UPDATE & OUTLOOK

 

  • The US Aggregate Bond Index fell -2.61% in September. Treasury yields moved sharply higher and credit spreads widened, which coupled to push prices for most fixed income securities lower on the month.
  • Economic data strengthened, led by a stronger than expected August employment report. Inflation data remained solidly above the Fed’s long-term target. Q2 GDP was revised higher to +2.2% annualized, driven by a surge in consumer spending to +3.8%.
  • Yields moved sharply higher and the US Treasury curve flattened in September. Yields for 2- through 10-year Treasury Notes backed up by 54 to 60 basis points (bps), while yields on longer-term Treasuries rose by 40 to 45 bps.
  • Despite increased volatility in the bond markets, spreads for investment-grade (IG) corporates remined in a relatively tight range. The option-adjusted spread (OAS) of the index closed September at 80 bps, +2 bps wider on the month.
  • After remaining firm for most of the quarter, high yield (HY) credit spreads widened during the second half of September, with the OAS of the US Corporate HY Index closing the month at 311 bps, 50 bps wider. Despite this move, the high yield index outperformed the Bloomberg Aggregate Index on a total return basis given its lower sensitivity to interest rates and higher yields.
  • Mortgages significantly underperformed Treasuries, with the curve flattening and rate volatility increasing. The MBS Index ended September at an OAS of 43 bps, widening by 14 bps.
  • Asset-backed securities (ABS) were the lone bright spot in higher-quality fixed income. The ABS Index posted an excess return of 0.09% in September, versus -0.96% for the Mortgage-Backed Securities (MBS) Index and -1.34% for the US Corporate HY Index. IG corporates broke even to Treasuries.
  • The preferred sector was the underperformer on the month, returning -3.41% in September, despite relatively flat equity market returns.

SECTOR ALLOCATION

POSITIONING
DURATION & YIELD CURVE
 The FOMC increased interest rates by 25 bps in September and signaled for further potential rate hikes this year and next. In addition, with the conflict between the US and Iran escalating again, oil prices remain near $100/barrel. Treasury yields are now trading at or near their highest levels of the past two decades. Given the move higher in rates and the increase in volatility in the markets, our duration posture leaves us slightly long versus our benchmarks, and we continue to favor the intermediate part of the Treasury curve.
TREASURIES
 We maintain our overweight to spread product versus Treasuries in what remains an attractive carry environment, coupled with relatively muted volatility in spreads as compared to Treasury yields.
GOVERNMENT RELATED
 We continue to be overweight taxable municipal bonds, supported by strong fundamentals and the relatively recession-resistant characteristics of the asset class.
CORPORATE BONDS
 Tactically, we remain overweight corporates, where spreads have been relatively stable despite the numerous uncertainties that are driving intra-day moves in Treasury yields. The corporate credit story remains compelling for carry-focused investors as the US economy continues to be resilient. Corporate fundamentals remain solid, earnings continue to be strong, and technicals remain favorable given attractive all-in yields.
SECURITIZED
 Agency MBS and ABS continue to be core components of our portfolio allocation. Spreads for MBS are near their widest levels of the year, while technicals remain reasonably constructive. We feel that the securitized market offers attractive relative value and favorable risk-adjusted return potential in the current environment.

 

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Disclosures

This represents the views and opinions of GW&K Investment Management and does not constitute investment advice, nor should it be considered predictive of any future market performance. Data is from what we believe to be reliable sources, but it cannot be guaranteed. Opinions expressed are subject to change. Past performance is no guarantee of future results.

Indexes are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in an index. Index data has been obtained from third-party data providers that GW&K believes to be reliable, but GW&K does not guarantee its accuracy, completeness or timeliness. Third-party data providers make no warranties or representations relating to the accuracy, completeness or timeliness of the data they provide and are not liable for any damages relating to this data. The third-party data may not be further redistributed or used without the relevant third-party’s consent. Sources for index data include: Bloomberg, FactSet, ICE, FTSE Russell, MSCI and Standard & Poor’s.

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