Exhibit I: Fixed income index returns for various indexes as of September 30, 2025, displaying duration, total return, and excess return.
3Q Highlights
|
| Performance As of September 30, 2025 |
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|---|---|---|---|---|---|---|
|
Total Return |
Average Annual Total Returns |
||||
Composite/Benchmark |
3 Mo. |
YTD |
1 Yr. |
3 Yr. |
5 Yr. |
Since Inception |
BBH Structured Fixed Income Composite (Gross of Fees) |
1.62% |
5.54% |
7.13% |
8.50% |
5.41% |
4.99% |
BBH Structured Fixed Income Composite (Net of Fees) |
1.53% |
5.27% |
6.76% |
8.12% |
5.05% |
4.63% |
BBH Structured Fixed Income Benchmark |
1.46% |
4.49% |
4.94% |
5.26% |
2.06% |
2.49% |
Past performance does not guarantee future results Composite Inception Date: 01/01/2016 Sources: Bloomberg and BBH & Co. |
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Market Environment
U.S. fixed income markets posted solid returns during third quarter 2025 as interest rates declined across the curve, the Federal Reserve (the Fed) cut rates, and credit risk spreads narrowed further. All mainstream indexes had positive total returns and excess returns to credit.
Credit risk spreads were lower across all major indexes, and, for many indexes, quarter-end index spreads declined to levels last experienced in the late 1990s. The Bloomberg U.S. Corporate Index’s quarter-end spread hit its lowest month-end level since May 1998, while month-end spreads of double-B and single-B corporate bonds were lower at quarter-end only four times over the past 30 years. Structural changes to the composition of broad investment grade and high yield corporate bond indexes may provide reasons for these low spread levels. Looking forward from these spread levels, expected credit returns are meager and negative in many instances.
Unsurprisingly, the BBH Valuation Framework1 indicates a very low level of appropriately valued opportunities. The Framework showed that 3% of investment grade corporate bonds, 44% of corporate loans, 24% of high-yield corporate bonds, and no segment of the agency mortgage-backed securities (MBS) market met our criteria for purchase at quarter-end. Spreads of collateralized loan obligation (CLO) debt and many nontraditional asset-backed security (ABS) subsectors sit at the narrowest ends of their historic ranges. However, there remain opportunities in pockets of the credit markets. For example, there are opportunities for incremental yield in shorter maturity, high-grade corporate bonds. Debt of smaller issuers also screens favorably within the high yield bond and loan markets. Several nontraditional ABS subsectors screen attractively, and spreads of many commercial mortgage-backed security (CMBS) subsectors are at or above the medians of their historical ranges.
Valuations
Both supply and demand for credit continue to be very strong. Credit issuance was strong vs. the subdued volumes from last quarter on account of lower interest rates and narrower credit risk spreads. Leveraged corporate issuers increasingly chose bond issuance, where volumes were up 6% over last year vs. loans (down 11%). ABS volumes were down 2% from 2024’s pace for both traditional and nontraditional subsectors. Nonagency CMBS issuance was robust, with 40% more issuance than last year. Meanwhile, taxable bond fund flows are on pace to have one of the strongest calendar years on record. According to research from Barclays, new issues of investment grade corporate bonds have been approximately four times oversubscribed, with yields driven lower by 0.25% from their announcement to final pricing. Debt markets are open to issuers looking to refinance or raise new capital.
Generous refinancing availability tends to obscure cracks in credit quality; however, there are several trends that suggest the durability of issuers may be tested in the near future. Signs of stress are emerging for lower-income U.S. consumers. These consumers’ wages have not kept pace with the inflationary environment of 2022–2023, and high prices continue to impact spending choices. These inflationary dynamics will likely continue over the next 12 months. Prices of nonessential commodities such as coffee and chocolate have surged and are shifting consumers’ spending patterns towards staple goods. In addition, the price of federal healthcare programs is expected to increase by a median 18% in 2026 with the expiration of Affordable Care Act subsidies. Labor market conditions are a reason for concern, as wage growth has moderated and non-farm payrolls sit near their weakest levels in over 15 years (excluding the months following the onset of COVID-19). There are many loan credit performance indicators that suggest these trends are beginning to impact credit markets. Subprime auto loan default rates are near the higher end of their historical range. Delinquency rates of student loans are elevated after the U.S. government’s forbearance program ended, yet the resumption of student loan payments has not yet appeared to impact delinquency rates of other types of consumer loans.
Performance
The portfolio outperformed its benchmark during the quarter with selection and sector effects driving performance. Positive sector effects were driven by exposure within holdings of CMBS and corporate credit, while exposures within holdings of ABS detracted. Positions in Freddie K CMBS, investment grade corporate bonds of business development companies (BDC’s), and CLOs contributed the most to performance. Holdings of triple net lease ABS, cell tower ABS, and collateralized fund obligation ABS detracted from performance.
Exhibit III: Attribution as of September 30, 2025, showing average portfolio weight and gross contribution displayed in basis points.
Transaction Summary
We continued to find durable credits2 offering attractive value even as valuations reflect a growing belief that the U.S. economy is slowing. The table below summarizes a few notable portfolio additions.
Characteristics
At the end of the quarter, the portfolio’s duration was 1.9 years and continued to approximate that of its benchmark. The portfolio’s yield and spread over treasuries remained elevated and differentiated vs. the benchmark. The portfolio’s weighting to high yield and nonrated instruments remained near 16% at quarter-end. The portfolio’s weight across sectors remained relatively unchanged quarter over quarter.
Exhibit V: Characteristics as of September 30, 2025, including credit rating and sector allocation.
Concluding Remarks
U.S. business conditions appear stronger. Default rates continue to moderate, delinquency rates and charge-offs of business loans remain subdued, and loan performance within CLOs and business development companies (BDCs) remains strong. There are significant infrastructure capital expenditures being made to support artificial intelligence (AI) ambitions, and they are being financed through the corporate and structured credit markets. With narrow spreads and many of these projects facing uncertain outcomes, strong credit research is paramount for navigating the increasing breadth of opportunities.
Strong credit research is always a necessary ingredient for attaining sustainable credit performance, and it is perhaps no surprise that our credit research identifies many issues that offer attractive yields but do not possess the durability features we seek. However, opportunities remain in every market. In environments of low-risk spreads and sparse opportunity, we believe that the virtues of a bottom-up process build portfolios of durable credits at attractive yields that can prevail in economic uncertainty and benefit our clients’ performance journey.
1Our valuation framework is a purely quantitative screen for bonds that may offer excess return potential, primarily from mean reversion in spreads. When the potential excess return is above a specific hurdle rate, we label them “Buys” (others are “Holds” or “Sells”). These ratings are category names, not recommendations, as the valuation framework includes no credit research, a vital second step.
2Obligations such as bonds, notes, loans, leases, and other forms of indebtedness, except for cash and cash equivalents, issued by obligors other than the U.S. Government and its agencies, totaled at the level of the ultimate obligor or guarantor of the Obligation. Durable means the ability to withstand a wide variety of economic conditions.
Definitions
Bloomberg US ABS Index is the asset backed securities component of the Bloomberg US Aggregate Bond Index. The index includes pass-through, bullet, and controlled amortization structures. The ABS Index includes only the senior class of each ABS issue and the ERISA-eligible B and C tranche. The Bloomberg U.S. ABS ex. Stranded Cost Utility Index excludes certain stranded cost utility bonds included in the Bloomberg US ABS Index.
An index is not available for direct investment.
“Bloomberg®” and the Bloomberg indexes are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the indexes (collectively, “Bloomberg”) and have been licensed for use for certain purposes by Brown Brothers Harriman & Co (BBH). Bloomberg is not affiliated with BBH, and Bloomberg does not approve, endorse, review, or recommend the Strategy. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to the Strategy.
Risks
Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk; investments may be worth more or less than the original cost when redeemed. Mortgage-backed and asset-backed securities have prepayment and extension risks.
SASB lacks the diversification of a transaction backed by multiple loans since performance is concentrated in one commercial property. SASBs may be less liquid in the secondary market than loans backed by multiple commercial properties.
Asset-Backed Securities (“ABS”) are subject to risks due to defaults by the borrowers; failure of the issuer or servicer to perform; the variability in cash flows due to amortization or acceleration features; changes in interest rates which may influence the prepayments of the underlying securities; misrepresentation of asset quality, value or inadequate controls over disbursements and receipts; and the ABS being structured in ways that give certain investors less credit risk protection than others.
Below investment grade bonds, commonly known as junk bonds, are subject to a high level of credit and market risks.
Foreign investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.
The Structured Fixed Income Strategy Representative Account is managed with the same investment objectives and employs substantially the same investment philosophy and processes as the strategy.
The securities discussed do not represent all of the securities purchased, sold or recommended for advisory clients and you should not assume that investments in the securities were or will be profitable.
Opinions, forecasts, and discussions about investment strategies represent the author’s views as of the date of this commentary and are subject to change without notice.
Issuers with credit ratings of AA or better are considered to be of high credit quality, with little risk of issuer failure. Issuers with credit ratings of BBB or better are considered to be of good credit quality, with adequate capacity to meet financial commitments. Issuers with credit ratings below BBB are considered to be of good credit quality, with adequate capacity to meet financial commitments. Issuers with credit ratings below BBB are considered speculative in nature and are vulnerable to the possibility of issuer failure or business interruption. The Not Rated category applies to Non-Government related securities that could be rated but have no rating from Standard and Poor’s or Moody’s. Not Rated securities may have ratings from other nationally recognized statistical recognized statistical rating organizations.
Brown Brothers Harriman Investment Management (“IM”), a division of Brown Brothers Harriman & Co (“BBH”), claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.
To receive additional information regarding IM, including a GIPS Composite Report for the strategy, contact John Ackler at 212 493-8247 or via email at john.ackler@bbh.com.
Gross of fee performance results for this composite do not reflect the deduction of investment advisory fees. Actual returns will be reduced by such fees. “Net” of fees performance results reflect the deduction of the maximum investment advisory fees. Returns include all dividends and interest, other income, realized and unrealized gain, are net of all brokerage commissions, execution costs, and without provision for federal or state income taxes. Results will vary among client accounts. Performance calculated in U.S. dollars.
The objective of our Structured Fixed Income Strategy is to deliver excellent returns in excess of industry benchmarks through market cycles. The Composite is comprised of all fully discretionary, fee-paying structured fixed income accounts over $10 million. Investments are focused on asset-backed securities, commercial mortgage-backed securities, collateralized loan obligations, and corporate debt securities that are primarily investment grade. Non-investment grade securities may be held. Investments are focused on U.S. dollar denominated securities, but non-U.S. dollar securities may be held. The accounts are managed to a duration +/- 2 years of the Bloomberg ABS ex-Stranded Cost Utility Index. Effective December 1, 2022, the composite definition was slightly altered to establish a band around the duration of the Bloomberg ABS ex-Stranded Cost Utility Index.
Duration is a measure of the portfolio’s return sensitivity to changes in interest rates.
Standard deviation measures the historical volatility of a returns. The higher the standard deviation, the greater the volatility. The Sharpe ratio is the average return earned in excess of the risk-free rate (the Fed Funds rate).
Traditional ABS include prime auto backed loans, credit cards and student loans (FFELP). Non-traditional ABS include ABS backed by other collateral types.
Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries. This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners. © Brown Brothers Harriman & Co. 2025. All rights reserved.
Not FDIC Insured No Bank Guarantee May Lose Money
IM-17480-2025-10-28 Exp. 01/31/2026
