Taxable Bond Snapshot October 2026

Key Takeaways:

  • Treasury yields fell sharply across the curve in October, despite higher oil prices, as investors began to question the resiliency of the AI-trade amidst disappointing Tech earnings. Yields hit multi-decade highs earlier in the month before the flight-to-quality bid drove them lower into month-end.
  • On the heels of a 25 basis point (bps) hike in September, the Federal Reserve (Fed) held rates steady in October, though there were two dissenters who called for another 25 bps increase. The market is now pricing in a roughly 70% chance of an additional hike before year-end.
  • Following its poor performance in September, the Bloomberg Aggregate Index bounced back, returning 2.44% in October.

TAXABLE BOND MARKET UPDATE & OUTLOOK

  • The Bloomberg Aggregate Bond Index returned 2.44% in October, driven by the sharp rally in Treasury yields. Spreads generally widened, with the exception of agency mortgage-backed securities (MBS), but the impact was not enough to offset the sharp move lower in rates.
  • Economic data was mixed, as the September employment report came in below consensus, Q3 GDP beat expectations at 3.4%, and inflation data remained solidly above the Fed’s long-term target. The mix reinforced the Fed’s hawkish stance but didn’t convince them to hike.
  • US Treasury yields moved sharply lower as the yield curve had a relatively parallel shift lower in October. Yields for 2-year Treasury notes and shorter fell 30 bps or less, while rates in the intermediate part of the curve declined by 34 to 38 bps. Yields on longer-term Treasuries retreated by 32 to 33 bps.
  • Spreads for investment-grade (IG) corporates moved wider on the month. The option-adjusted spread (OAS) of the Index closed October at 90 bps, 10 bps wider and its biggest one-month move since February.
  • High yield (HY) credit spreads gapped to their widest level of the year, with the OAS of the US Corporate HY Index closing the month at 340 bps, 29 bps wider. The move was driven primarily by weakness in the CCC-rated sector, where OAS widened by more than 100 bps in October and 500 bps since January.
  • Mortgages were the lone bright spot, as the sector rebounded following a weak September. The MBS Index ended the month at an OAS of 34 bps, tightening by 9 bps.
  • Asset-backed securities (ABS) lagged the strong performance in the MBS sector. In October, the ABS Index posted an excess return of -0.21%; MBS, +0.48%; IG corporates, -0.59%; and the US Corporate High Yield Index, -1.32%.
  • The preferred sector continued to underperform, returning -0.72% in October, reflecting weaker equity market returns.

SECTOR ALLOCATION

POSITIONING
DURATION & YIELD CURVE
 Despite the strong rally in October, Treasury yields remain near their highest levels of the past two decades. While the market is still pricing in two additional hikes by the Fed into 2027, given our overweight to spread product, our duration posture remains slightly long versus our benchmarks. We continue to favor the intermediate part of the Treasury curve.
TREASURIES
 We remain underweight Treasuries. While vigilant around potential short-term disruptions to spreads, over longer periods, Treasuries do not provide enough compensation to warrant holding an Index weight.
GOVERNMENT RELATED
 We continue to be overweight taxable municipal bonds, supported by strong fundamentals and the relatively recession-resistant characteristics of the asset class.
CORPORATE BONDS
 We remain overweight corporates. Spreads are approaching their widest levels of the year, reflecting the recent softness in the equity markets. Despite the recent underperformance of the sector, we believe that the corporate credit story remains compelling for carry-focused investors as the US economy continues to be resilient. Corporate fundamentals remain solid, as earnings continue to be strong, consumer activity remains robust, and technicals are favorable given attractive all-in yields.
SECURITIZED
 Agency MBS and ABS continue to be core components of our portfolio allocation. Spreads for MBS have tightened from their widest levels of the year but still look attractive on a longer-term basis and technicals remain reasonably constructive. We feel that the securitized market offers attractive relative value and favorable risk-adjusted return potential in the current environment.

 

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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 no guarantee 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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