Q4 2025 Investment Review
Summary
Bond markets closed 2025 on a strong note, with another positive quarter driven by solid performance in Agency MBS and other structured sectors such as ABS and CMBS. Inflation continued to trend lower, the labor market showed signs of moderation rather than weakness, and consumers remained resilient, supported by manageable household debt levels and optimism about GDP growth heading into 2026.
Despite this constructive backdrop, not all areas of the economy are firing on all cylinders, as manufacturing indicators like ISM new orders and employment remain in a prolonged slowing trend. Together with tight credit spreads and lingering policy uncertainty in Washington, these crosscurrents set the stage for a cautious but constructive fixed income outlook as investors look to balance opportunity with risk in the year ahead.
Q1 Strategy
Looking into the first quarter of 2026, the strategy centers on cautious optimism: recognizing that the Fed has not fully tamed inflation and that bond spreads leave little room for error, while still seeing potential for mid‑4 percent yields and comparable return prospects. The team is maintaining a relatively neutral interest rate stance, expecting the 10‑year Treasury to trade in a 3.95–4.25 percent range, and emphasizing disciplined risk management as conditions evolve.
Positioning across sectors remains selective, with reduced underweights in industrials and incremental additions to technology and non‑cyclical credits, even as valuations stay stretched. The portfolio also modestly trims overweight financials, stays focused on high‑quality tranches in CMBS, and continues to find value in auto ABS relative to short corporates, all while preparing to take advantage of record expected issuance in 2026 when spreads and structures become compelling.
