Q3 2026 Investment Review
Summary
Bond markets came under pressure in the third quarter as high energy prices and persistent cost pressures pushed inflation back to the top of investor concerns. The economy remained resilient, with consumer spending, corporate investment, a steady labor market, and solid corporate earnings all supporting growth. Treasury yields rose sharply, with the 10-yr. jumping 82bps to close at 5.29%, its highest level in about 20 years, and the Federal Reserve responded with a unanimous rate hike at its September meeting. The Bloomberg US Aggregate Index fell 3.51% for the quarter, as corporate bonds finally succumbed to heavy new issuance and finished down almost 4%, while CMBS and ABS outperformed but still ended in the red. Credit spreads widened modestly but remain inside their long-term averages. The Bloomberg Intermediate US Govt./Credit Index finished down 1.88%, while the shorter duration 1-3yr version nearly broke even at -0.18% on the quarter.
Q4 Strategy
Our strategy remained consistent during Q3, mainly maintaining an upward bias to credit quality. Supply remained heavy in Q3 with a heavy-looking calendar on the horizon. We added to the tech-heavy supply during the quarter, but we remain underweight overall due to supply concerns. We remain cautious on CMBS, which is typically an underperformer during macro volatility. Year to date, excess returns have been strong, but spreads are near historical tights even after some widening in September, indicating more downside than upside. We will look to add to high-quality newly issued last cash flows and select AAA-rated SASB if spreads widen further. In esoteric ABS, we’re looking to add fiber ABS, capitalizing on the digital infrastructure boom without the risk of heavy supply typically associated with data center ABS.
