In January and February, interest rates declined and the yield curve flattened as softer economic data increased market expectations for Fed rate cuts later in the year. At the same time, companies continued to deliver revenue and earnings growth, though many revised guidance lower for the balance of 2026. Concerns also began to build around the potential impact of AI on business models, emerging issues in private credit, and rising geopolitical tensions.
By March, geopolitics took center stage. The war in Iran drove oil prices sharply higher, reigniting inflation concerns and prompting a repricing of the Fed’s expected rate path. The FOMC held rates steady at both its January and March meetings, noting uncertainty around the economic implications of developments in the Middle East.
While early optimism around rate cuts supported a solid start to the year, $100 per barrel oil ignited further inflation fears and economic uncertainty ended up reversing those gains in March. The Bloomberg Aggregate Bond Index finished the first quarter slightly negative, down -0.05%. Risk assets weakened as credit spreads widened across sectors, resulting in negative absolute and excess returns for both investment-grade and high-yield bonds. Securitized products were the exception, posting positive returns across MBS, ABS, and CMBS.
Fundamentally, corporate credit markets entered the year well positioned, with both investment-grade and high-yield spreads briefly reaching cycle tights in late January before increased volatility pushed spreads wider. With spread measures historically tight, the market remained vulnerable in the short term as investors priced in greater uncertainty. AI-driven job market friction and private credit concerns that had already been building were compounded by renewed tariff uncertainty, heightened geopolitical tensions, and inflation fears. Investment-grade spreads ended the quarter at 89 bps, widening 11 bps, resulting in a -0.5% decline. The high-yield market performed only slightly better, as higher carry and shorter duration helped offset more substantial spread widening.
Within high yield, higher quality outperformed. BBs ended the quarter 32 bps wider, while CCCs ended 110 bps wider. Although credit fundamentals remain solid and investor demand has held up well through the recent volatility, corporate credit markets are likely to remain vulnerable to continued private credit liquidity fears and geopolitical events in the near term.
Securitized products outperformed credit and Treasuries in the first quarter, with Agency MBS leading early on strong technical demand following the Federal Housing Finance Agency’s directive for government-sponsored enterprises (GSEs) to purchase $200 billion of MBS. Some of this outperformance reversed later in the quarter as rates moved higher and rate volatility increased sharply amid tensions in the Middle East. CMBS and ABS outperformed over the period, benefiting from crossover demand from MBS investors in January, while their lower sensitivity to rate volatility supported relative spread performance. The securitized sector generated 16 bps of excess return and 40 bps of total return for the quarter. The outlook remains constructive, supported by constrained supply and steady demand from GSEs and bank deregulation on the horizon.
Stable economic growth, future rate cuts by the Fed, supportive administration and fiscal policy, and falling volatility in capital markets all supported our view entering 2026 of a positive environment for credit and securitized markets. The war in Iran and the subsequent increase in oil prices has driven volatility and interests rates higher and spreads for fixed income sectors wider, given the increased uncertainty about the impact to both inflation and economic growth. We believe the reaction in the market has been a “risk-rotation move,” as opposed to “risk-off event,” based on fund flows and trading activity. Unless the war were to drag on for several months and oil prices remain elevated for an extended period of time, we would expect this to continue to be the case. As such, active management and our positioning in corporates and high-quality securitized product should leave us well positioned to manage through this current period of increased volatility.
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 not indicative 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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Taxable Bond Snapshot March 2026
Taxable Bond | Insight
Geopolitics dominated the macro and market backdrop in March, with the conflict in Iran driving oil prices up and delaying expectations for interest-rate easing from the Fed.
The US Aggregate Bond Index delivered a modest 0.11% return in January, as spread tightening and carry in corporate bonds and mortgage-backed securities more than offset a small increase in Treasury yields.
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Taxable Bond Market Commentary – 1Q 2026
In January and February, interest rates declined and the yield curve flattened as softer economic data increased market expectations for Fed rate cuts later in the year. At the same time, companies continued to deliver revenue and earnings growth, though many revised guidance lower for the balance of 2026. Concerns also began to build around the potential impact of AI on business models, emerging issues in private credit, and rising geopolitical tensions.
By March, geopolitics took center stage. The war in Iran drove oil prices sharply higher, reigniting inflation concerns and prompting a repricing of the Fed’s expected rate path. The FOMC held rates steady at both its January and March meetings, noting uncertainty around the economic implications of developments in the Middle East.
While early optimism around rate cuts supported a solid start to the year, $100 per barrel oil ignited further inflation fears and economic uncertainty ended up reversing those gains in March. The Bloomberg Aggregate Bond Index finished the first quarter slightly negative, down -0.05%. Risk assets weakened as credit spreads widened across sectors, resulting in negative absolute and excess returns for both investment-grade and high-yield bonds. Securitized products were the exception, posting positive returns across MBS, ABS, and CMBS.
Fundamentally, corporate credit markets entered the year well positioned, with both investment-grade and high-yield spreads briefly reaching cycle tights in late January before increased volatility pushed spreads wider. With spread measures historically tight, the market remained vulnerable in the short term as investors priced in greater uncertainty. AI-driven job market friction and private credit concerns that had already been building were compounded by renewed tariff uncertainty, heightened geopolitical tensions, and inflation fears. Investment-grade spreads ended the quarter at 89 bps, widening 11 bps, resulting in a -0.5% decline. The high-yield market performed only slightly better, as higher carry and shorter duration helped offset more substantial spread widening.
Within high yield, higher quality outperformed. BBs ended the quarter 32 bps wider, while CCCs ended 110 bps wider. Although credit fundamentals remain solid and investor demand has held up well through the recent volatility, corporate credit markets are likely to remain vulnerable to continued private credit liquidity fears and geopolitical events in the near term.
Securitized products outperformed credit and Treasuries in the first quarter, with Agency MBS leading early on strong technical demand following the Federal Housing Finance Agency’s directive for government-sponsored enterprises (GSEs) to purchase $200 billion of MBS. Some of this outperformance reversed later in the quarter as rates moved higher and rate volatility increased sharply amid tensions in the Middle East. CMBS and ABS outperformed over the period, benefiting from crossover demand from MBS investors in January, while their lower sensitivity to rate volatility supported relative spread performance. The securitized sector generated 16 bps of excess return and 40 bps of total return for the quarter. The outlook remains constructive, supported by constrained supply and steady demand from GSEs and bank deregulation on the horizon.
Stable economic growth, future rate cuts by the Fed, supportive administration and fiscal policy, and falling volatility in capital markets all supported our view entering 2026 of a positive environment for credit and securitized markets. The war in Iran and the subsequent increase in oil prices has driven volatility and interests rates higher and spreads for fixed income sectors wider, given the increased uncertainty about the impact to both inflation and economic growth. We believe the reaction in the market has been a “risk-rotation move,” as opposed to “risk-off event,” based on fund flows and trading activity. Unless the war were to drag on for several months and oil prices remain elevated for an extended period of time, we would expect this to continue to be the case. As such, active management and our positioning in corporates and high-quality securitized product should leave us well positioned to manage through this current period of increased volatility.
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 not indicative 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.