Taxable Bond Snapshot May 2026

Key Takeaways:

• Rates sold off while most risk assets rallied as the US and Iran inched closer to reaching a deal and extending the ceasefire in the Middle East. Economic data and robust corporate earnings growth also provided support.
• Interest rates were higher across the curve, led by the belly of the Treasury market. Spread product tightened versus Treasuries. The US Aggregate Bond Index posted a return of +0.31% for the month.
• Kevin Warsh was confirmed as Fed Chairman of the FOMC, but he inherits a committee that appears to be divided and leaning “hawkish”. The market expects the Committee to remain on hold in June and at the end of May was pricing in a 70% chance of one hike by year end.

TAXABLE BOND MARKET UPDATE & OUTLOOK

• Despite higher rates, the US Aggregate Bond Index posted a positive return in May, up 0.31%. For the second month in a row, negative price performance was offset by carry and tighter spreads.
• The war in the Middle East, strong corporate earnings, and economic data releases continue to dominate investors’ attention. Despite uncertainty around energy prices, US GDP growth looks solid, driven by resilient consumer spending and booming AI investment.
• Treasury yields moved higher, led by the 2- to 5-year part of the curve, where yields rose 13-16 basis points (bps). Further out the curve, rates increased 9 bps or less.
• Investment-grade (IG) corporate credit outperformed Treasuries, with spreads tighter by 7 bps. IG spreads remain in a narrow trading range and at an option-adjusted spread (OAS) of 72 bps, they are now within 1 bp of the lows for this credit cycle, dating back to 2014.
• High yield (HY) credit spreads also narrowed and are now less than 7 bps away from the YTD tights. Spreads tightened 11 bps, with the OAS of the Index closing May at 257 bps. The HY Index slightly outperformed the Aggregate Index, posting a 0.49% return for the month.
• Once again, securitized products outperformed Treasuries but lagged corporates. Spreads for Agency mortgage-backed securities (MBS) widened out mid-month as Treasury volatility moved higher. Spreads then tightened as volatility receded, and the Index ended the month at an OAS of 22 bps, +2 bps wider.
• Against similar duration Treasuries, asset-backed securities (ABS) outperformed but lagged other spread sectors. The ABS Index posted an excess return for the month of 0.08%, versus 0.56% for IG corporates and 0.13% for MBS.
• The preferred sector lagged most other risk assets for the month, returning -0.43% in May, primarily due to the sensitivity of the index to rising interest rates.
  

  SECTOR ALLOCATION	POSITIONING
  DURATION & YIELD CURVE	Our duration stance remains neutral. The FOMC appears to be stuck in a holding pattern as new Fed Chairman Kevin Warsh takes the reigns and uncertainty remains over the war in the Middle East and its potential impacts to the economy. Given this, we deem a neutral stance to be prudent until there is more clarity regarding the resolution of the conflict and the longer-term impacts to inflation and economic growth.
  TREASURIES	We continue to favor spread product over Treasuries in what remains an attractive carry environment, with a focus on high-quality, liquid issues and issuers.
  GOVERNMENT RELATED	Likewise, we maintain our overweight to taxable municipal bonds, supported by strong fundamentals and the relatively recession-resistant characteristics of the asset class.
  CORPORATE BONDS	Tactically, we continue to overweight corporates. While macro risks warrant some caution and valuations remain rich relative to longer-term averages after tightening again this month, the credit story remains compelling for carry-focused investors. Overall, corporate fundamentals are solid, earnings remain supportive, and technicals continue to be favorable given attractive all-in yields.
  SECURITIZED	Agency MBS and ABS remain core components of our portfolio allocation. Spreads for MBS are trading in the middle of their 6-month range, volatility has fallen from its recent highs, and technicals remain positive. We feel that the securitized market still offers attractive relative value and favorable risk-adjusted return potential in the current environment.