Taxable Bond Market Commentary – 2Q 2026

The second quarter began on a positive note following the announcement of a ceasefire in the war with Iran on April 7, which caused risk assets to rally. The markets began to look through geopolitical risk and focus instead on the continued strength in corporate earnings growth. The positive tone continued through May as the US and Iran inched closer to a deal and robust earnings growth was met with strong economic data. By late June, the two sides had signed a memorandum of understanding (MOU) and agreed to begin negotiations to end the war, which further buoyed risk assets. However, the June FOMC meeting, the first under Chairman Warsh’s leadership, was decidedly hawkish, pushing front-end rates higher and moving spreads modestly off of their tights for the year.

The Bloomberg US Aggregate Bond Index bounced back in the second quarter, posting a 0.7% return, which pushed the year-to-date return for the benchmark back into positive territory. Risk assets led the way, on the heels of US equity markets posting their strongest quarterly returns since 2020. Spreads tightened for various sectors of the Index, paced by investment grade (IG) and high yield (HY) corporates, leading to positive absolute and excess returns across the various spread sectors. For the quarter, the US High Yield Index posted an excess return of 221 basis points, followed by IG Corporates with 117 basis points of excess returns. The ABS Index beat duration-matched Treasuries by 36 basis points, and the MBS Index outperformed by 30 basis points.

Corporate credit markets delivered strong second quarter returns, as resilient demand and robust earnings growth outweighed geopolitical uncertainty and a surprisingly heavy issuance calendar. IG supply remained elevated, leaving the market on pace for a record year, but the issuance was easily absorbed by investor demand. Through the quarter, credit markets moved with developments in Iran and shifting levels of AI optimism, but the overall direction was clearly supported by de-escalation and an appetite for risk. That favorable backdrop drove lower-quality outperformance across both IG and HY. BBBs returned 1.7%, outpacing the broader IG Corporate Index, and ended the quarter 18 basis points tighter. Within HY, CCCs led returns, benefiting from higher coupons and less rate sensitivity. BBs outperformed BBBs, posting a 2.3% return and ending the quarter 41 basis points tighter. While credit fundamentals remain solid and market demand appears durable, tighter spreads leave less room for error. As Iran risk recedes, the focus for corporate credit is likely to shift back to AI infrastructure investment and whether that spending strengthens or pressures corporate fundamentals in the coming quarters.

Securitized products outperformed Treasuries but lagged IG and HY credit, with the OAS of the Agency MBS Index unchanged over the course of the quarter. While the quarter saw unchanged MBS spreads, looking closer shows in fact a bumpy ride, as uncertainty stemming from the conflict in Iran injected volatility into the price of oil as well as interest rates, which led to volatility in mortgage spreads. CMBS and ABS fared slightly better, as economic data continued to show strength and their lower sensitivity to rate volatility supported relative spread performance. The securitized sector generated 30 basis points of excess return and 58 basis points of total return for the quarter. Overall, the outlook remains constructive, as supply remains constrained due to the high level of mortgage rates and continued clarity on bank deregulation is supportive of bank demand.

Despite the increase in volatility in the second quarter amidst uncertainty over the conflict in Iran, spreads for various fixed income sectors traded in relatively narrow ranges. An overweight to spread product proved to be beneficial, as the various spread sectors generated positive excess returns. With tensions having eased in the Middle East since the MOU was signed by the US and Iran, the market’s focus has turned back to the domestic economy and future of monetary policy by the FOMC under Chairman Warsh’s leadership. Expectations are for inflation to ultimately move back down toward the Fed’s long-term target, while growth is expected to remain strong, driven by resilient consumer demand and continued corporate spending in support of the growth of AI infrastructure. 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.