Taxable Bond Market Commentary – 3Q 2026

For the first two months of the third quarter, fixed income markets were reasonably well behaved, with yields drifting slightly higher and spreads continuing to trade in reasonably tight ranges. But faced with persistently strong economic data, highlighted by the August employment report, and renewed hostilities in the Middle East, which pushed oil prices back up over $100/barrel, Treasury yields moved increasingly higher throughout September. The FOMC raised rates by 25 basis points at its September meeting and signaled another hike by year-end. By month-end, Treasury yields across the curve had climbed to multi-decade highs, with the 30-year yield closing at 5.63%—up 67 basis points for the quarter and its highest level since 2002.

The Bloomberg Aggregate Bond Index suffered its worst quarter since 2022, posting a -3.5% return for the third quarter, which pushed the year-to-date return for the benchmark back into negative territory. Interest rates rose and risk assets generally underperformed, despite the S&P 500 and Nasdaq Indexes returning over 2% for the quarter. Spreads widened for most sectors of the fixed income market, led by high yield (HY) corporates and MBS, leading to negative absolute and excess returns across the various spread sectors. For the quarter, the MBS Index posted an excess return of -116 basis points, followed by HY corporates with -68 basis points of excess returns. Spreads for investment grade (IG) corporates traded in much tighter ranges, and the sector posted an excess return of -14 basis points versus Treasuries. The ABS Index was the lone bright spot, beating duration-matched Treasuries by 14 basis points.

Through early September, corporate credit markets absorbed steadily rising interest rates and a record pace of AI-related debt issuance, while spreads remained near the lows of the year. Resilient economic data, strong corporate earnings, and attractive all-in yields supported fundamentals and investor demand. However, this backdrop shifted in September, as an acceleration in the interest rate selloff drove outflows from corporate credit and pushed spreads wider into quarter end. All segments of corporate credit delivered negative returns. Higher quality, longer duration assets saw the biggest declines, primarily because of rising Treasury yields. BBB-rated corporates declined -3.7%, outperforming the IG Index, while B-rated HY corporates delivered the strongest relative performance, declining only -1.2%. CCCs diverged, as spreads widened more than 200 basis points on concerns about higher debt service and funding costs. Despite rate volatility, credit fundamentals remain solid and all-in yields support attractive total-return potential. AI-related funding should keep issuance elevated, but conditions appear supportive of demand.

Securitized products underperformed Treasuries and IG credit, but outperformed HY in the quarter. Index option-adjusted spreads widened primarily due to the selloff in Agency MBS. A flattening yield curve and sharply higher rate volatility weighed on the sector, while ABS outperformed with 14 basis points of excess return and CMBS performed in line with Treasuries. Both sectors benefited from their lower sensitivity to rate volatility. The Securitized sector returned -108 basis points on an excess return basis and -406 basis points on a total-return basis, with most of the underperformance occurring in September. This reset pushed MBS spreads to their widest levels in more than a year. Lower supply driven by elevated mortgage rates and limited housing turnover should provide a technical tailwind, although we remain cautious as rate volatility could stay elevated into the fourth quarter.

Treasury yields across the curve hit multi-decade highs as they pushed higher the last two weeks of September. The recent move finally dragged fixed income spreads wider despite equity markets continuing to trade near their YTD highs. The FOMC stands committed to driving inflation back down toward the Fed’s long-term target. Meanwhile, growth continues to remain strong, driven by resilient consumer demand and continued corporate spending in support of the growth of AI infrastructure. With yields at current levels, fixed income should be attractively positioned to once again provide both income and ballast within investors’ portfolios. With the yield of the Bloomberg Aggregate Bond Index (5.6% as of 9/30/26) now approaching the duration of the Index (5.8)—a dynamic that has not existed since before the GFC—investors are much better protected against further interest-rate risk. Once again, we believe that active management and our positioning in corporates and high-quality Securitized product should leave us well positioned in this environment.