Taxable Bond Market Commentary – 3Q 2025

The quarter began with solid jobs data and growth signals that allowed the Fed to be patient on moving rates due to inflation concerns, but momentum flipped after a weak July employment report exposed real signs of labor market softening. That shift quickly became the market’s focal point, fueling expectations for a rapid Fed cutting cycle. Inflation pressures remained sticky, but took a backseat to the risk of rising unemployment in the eyes of the market and the Fed. At Jackson Hole, Chair Powell reinforced that shift, stressing labor market risks and preparing the market for easing. The Fed delivered a September cut as expected, but Powell stopped short of committing to a more aggressive path. The message balanced still-firm growth data with the need to protect employment. Looking ahead, both markets and the Fed appear aligned that the primary concern is preventing further labor market deterioration, with inflation viewed as being broadly on track.

That pivot in focus supported another strong quarter for fixed income markets. The Bloomberg Aggregate Bond Index returned just over 2.0%, keeping 2025 on pace for its best year since 2020. Credit once again led the way, with spreads grinding tighter across corporates and securitized sectors. Rates also rallied, driven by shifting Fed expectations. Front-end yields fell by more than 35 basis points as markets priced in greater conviction around Fed rate cuts, while 2-10-year yields fell by 5-10 basis points. Long-end yields were little changed, with the 30-year anchored by fiscal concerns and debt-sustainability risks. These rate moves pulled the Treasury curve to its steepest of the year before partially retracing in September as markets refocused on softer labor data and the looming risk of a government shutdown.

Credit extended its months-long rally in the third quarter, supported by strong technicals and shifting Fed expectations. Investment grade spreads tightened from multi-year wides in April to multi-decade lows by September, ending nine basis points lower at 74 basis points. High yield followed suit, narrowing 23 basis points, with CCCs leading performance. Resilient corporate fundamentals, benign macroeconomic data, and still-compelling all-in yields combined to keep demand for credit strong and fuel the rally. Importantly, the market absorbed record September issuance with ease as net supply lagged robust demand. These favorable technicals drove positive excess returns as both investment grade and high-yield sectors saw returns greater than 2.5% despite spreads starting the quarter near their tightest levels in years. With Fed policy easing and a broadly cooperative macro backdrop, flows should remain constructive into year-end, limiting the scope for material spread widening.

Beyond corporates, securitized products also outperformed comparable-duration Treasuries during the quarter, led by strength in agency mortgage-backed securities (MBS). The outlook for MBS improved as the curve steepened, interest-rate volatility eased, and prepayment risk remained muted. These factors boosted investor demand and compressed spreads. The MBS market also priced in potential positive adjustments to quantitative tightening (QT),pushing spreads to multi-year lows ahead of the September FOMC meeting. With no changes announced to date, however, modifications to QT or other government sources of demand remain only speculation. Commercial mortgage-backed securities and asset-backed securities also benefited from the risk-on tone, supported by solid demand across the front to intermediate portions of the yield curve. Overall, securitized markets continue to be well supported by favorable technicals and strong collateral fundamentals, offering compelling relative value in the current market environment.

Political efforts to influence or reshape the Federal Reserve have not succeeded so far, but market fears about potential policy interference remain valid and have promoted a steeper yield curve. Despite uncertainty over the rate path, monetary and fiscal support remain in place. At the same time, productivity gains from technological advancements and solid consumer balance sheets provide additional tailwinds. Together, these factors create a constructive backdrop for spread product, particularly default-remote corporates and high-grade securitized products and lead us to position ourselves accordingly.