Taxable Bond Market Commentary – 4Q 2025

The quarter began with a federal government shutdown, the longest in US history, creating a lack of official data releases and reducing visibility around the Federal Reserve’s willingness to lower rates. Despite this uncertainty, the market looked to other available data sources to reinforce a view that a weakening jobs market overshadowed stubbornly high, but moderating inflation. Ultimately, the Fed delivered on their second and third consecutive cuts, stressing their priority to manage near-term labor market risks while striking a less hawkish policy path than feared. The third quarter earnings season broadly exceeded expectations, delivering the fourth consecutive quarter of double-digit growth, painting the picture of an economy that remains resilient. A backdrop of an accommodative Fed, strong corporate fundamentals, and the lowest rate volatility in four years, allowed front-end Treasury rates to edge lower while boosting most risk markets.

The Bloomberg Aggregate Bond Index returned 1.1% for the quarter, capping off the best annual return since 2020 at 7.3%. The Securitized sector led the way with Agency Fixed Rate MBS spreads outperforming, benefiting from the reduced volatility in rates markets. Investment grade corporates managed to produce positive excess returns by offsetting modest spread widening with their additional carry over Treasuries. The Treasury curve continued to steepen, led by lower front-end rates with the 2- and 5-year declining 13 and 2 basis points, respectively, while 10- and 30-year rates were up 2 and 11 basis points. The 2s30s yield curve ended the year at its steepest level as the front end continued to be anchored by accommodative Fed policy while the long end faced investor fears over inflation, fiscal supply concerns, and dollar demand issues.

During the fourth quarter, concerns that idiosyncratic credit losses at lower-quality companies could broaden into systemic issues across loans and private credit contributed to a modest early selloff. Growing questions about returns on AI-infrastructure investments added pressure before risk markets rebounded on renewed rate cut optimism and moderating inflation. Investment grade spreads ended the quarter at 78 OAS, only a few basis points away from multi-decade lows, returning 0.8%. High yield spreads at 266 OAS were essentially unchanged, with CCCs underperforming in a reversal of last quarter’s strong lower-rated performance. Double-B and single-B spreads were slightly tighter, however, driving the High Yield Index to return 1.3%, slightly outperforming the Bloomberg Aggregate Bond Index. Corporate credit spreads continue to reflect limited downside risk amid low recession odds and a benign default outlook. Further, macro conditions remain supportive of investor demand and credit fundamentals, with risks more likely credit-specific than macro-related. However, a significant rise in net issuance next year introduces a new technical uncertainty.

Securitized products delivered strong performance in the fourth quarter, led by the outperformance of the Agency mortgage-backed security (MBS) sector. MBS spreads tightened to multi-year lows as persistently high mortgage rates constrained supply, while a steeper yield curve and declining rate volatility boosted demand. Overall, the outlook for securitized markets remains constructive, as the conclusion of quantitative tightening and the Fed’s initiation of reserve management operations in December are supportive of more rangebound rate volatility and sustained demand heading into the new year.

As we enter 2026, we are mindful of this administration’s meaningful efforts to further bolster various weaknesses in the economy, both through their actions in the capital markets and fiscal policy. At recent times of crisis, the markets have abided by the rule of “don’t fight the Fed” and looked for supportive monetary policy actions. Now, we’ve added other areas of the government to that support, and it has been evidenced with falling volatility in the capital markets. This backdrop looks to continue to be supportive of credit and securitized markets in the coming year, especially as the growth in technological advancements creates productivity gains and alters financial landscapes. Despite fears of global conflicts, an explosion of AI-driven debt supply, and markets that have priced much of the good news in, stable and reasonable fixed-income yields look to make this another year where thoughtful active management can find attractive value in corporates and high-grade securitized products.