Q1 2026 Investment Review
Summary
Bond markets experienced a sharp reversal in Q1 2026, as geopolitical shock overtook a constructive start to the year. The U.S. and Israeli strike on Iranian targets in late February — and Iran's subsequent closure of the Strait of Hormuz — sent energy prices surging and triggered a broad risk-off tone that persisted through quarter-end. The Bloomberg US Aggregate Index finished nearly flat after gaining close to 2% in January and February, with corporate bonds dragging on performance while structured sectors like ABS and CMBS held up relatively well.
Credit spreads widened for the first time in a while, with investment-grade spreads moving from the upper 70s to 89 basis points and high-yield spreads widening 50 basis points to close at 317 bps — though both remain closer to historical tights than to longer-term averages, leaving little cushion if conditions deteriorate further. On the economic front, consumers remain resilient and manufacturing showed its best three-month expansion since mid-2022, but decelerating GDP growth, softening job openings, and a jump in the Prices Paid component have raised fresh inflation concerns. With market expectations now pricing out the two rate cuts previously anticipated for 2026, the Fed finds itself in an increasingly difficult position.
Q1 Strategy
Looking into the second quarter of 2026, the strategy shifts toward a more defensive posture, acknowledging that elevated energy prices stemming from the Iranian conflict are likely to keep inflation pressures alive longer than previously expected. The team is maintaining a slightly shorter duration stance relative to each strategy's referenced index, positioning for the possibility that the bond market has not yet fully priced in renewed inflationary headwinds. On the credit side, the record Q1 issuance volume — $656 billion from 306 issuers, a 16% increase over Q1 2025 — created an opportunity to add higher-quality credit and selectively extend duration in corporate bonds at more attractive concessions. The portfolio remains cautious on CMBS given spread levels near historical tights and typical underperformance during macro volatility, though the team will look to add high-quality newly issued last cash flows and select AAA-rated SASB if spreads widen. In structured credit, 2-5 year last cash flow deals remain appealing relative to their 10-year counterparts, and the team is targeting fiber ABS as a way to gain digital infrastructure exposure ahead of expected heavy supply in data center ABS.
