Q2 2026 Taxable Fixed Income Commentary

Fixed income indices gained during second quarter 2026, as yields were cushioned by narrowing credit spreads against the impact of rising interest rates. Year to date, index returns have been paltry as interest rates rose and credit spreads hovered near historical lows. Credit excess returns over similar duration Treasuries were generally positive across sectors during the quarter and year to date.

Credit performance seems disconnected from the headlines. Inflationary concerns persist and have dissipated any prospective rate cut beliefs. U.S. consumer sentiment remains weak due to deepening concerns over affordability. The business uncertainties stemming from artificial intelligence (AI) disruption continue to loom. All of this is occurring as the Federal Reserve (the Fed) undergoes a change in leadership under new Chairman Kevin Warsh, who created task forces to focus on the Fed’s approaches to communications, balance sheet policy, data quality and timeliness, productivity and jobs, and inflation frameworks.

The overall impact on credit market fundamentals has been limited. U.S. consumers appear challenged but resilient, with consumer debt losses and delinquency rates hovering at historically normal levels. The default rates of high-yield bonds and loans appear to have stabilized at manageable levels. Private credit default rates are declining, as are concerns over an imminent broad-based surge in default activity. All of this is also occurring in a market where strong companies can easily access debt capital.

Credit valuations became less attractive during the quarter as credit spreads of every major market sector narrowed. The percentage of corporate bonds screening as potential “buy” opportunities for BBH decreased to 7% from 10% for investment grade and to 22% from 23% for high yield. In the loan market, however, the percentage of issues screening as a “buy” candidate increased to 62% from 55% last quarter. No coupon cohort of the agency mortgage-backed securities (MBS) market screened as a “buy” candidate according to our Valuation Framework.¹ In the structured credit markets, spreads narrowed but remain above historical lows. Spreads of nontraditional asset-backed securities (ABS) remain above cyclical lows, and single-asset single-borrower (SASB) commercial mortgage-backed securities (CMBS) spreads remain closer to their historic medians. Debt spreads of broadly syndicated loan (BSL) collateralized loan obligations (CLOs) narrowed and sat near cyclical lows. Spreads of debt tied to private credit narrowed during the quarter, while middle-market CLO and business development company (BDC) bond spreads declined to levels closer to cyclical lows after rising briefly last quarter amid concerns tied to software company exposures and elevated redemption requests.

There are pockets of opportunities throughout the credit markets, though selectivity is imperative. Within the investment grade corporate bond market, over 40% of finance company and life insurance names meet our criteria for purchase, and opportunities remain in bonds maturing under five years. In the high-yield bond market, over half of the automotive and finance company industries screen as “buy” opportunities, while an abundance of loans to cable satellite, broadcasting, and technology companies screen favorably, to name a few. Opportunities emerged in several structured credit sectors, including ABS backed by data centers, personal consumer loans, triple net leases, fiber optic networks, SASB CMBS, and BSL CLOs.

Higher interest rates have commanded investors’ attention, with fixed income funds experiencing inflows at a rapid pace. At the same time, credit issuance hit record-setting highs across several sectors and issuers were met with strong demand and low risk spreads. Volumes of investment grade corporate bonds increased 24%, high-yield bonds increased 21%, loans rose 25%, ABS increased 18%, and nonagency CMBS increased 30% year over year. Even volumes of debt tied to private credit rose strongly. New issue private credit CLO issuance increased 10% and BDC debt volumes rose 63% from last year’s pace. The theme of issuance tied to the buildout of AI infrastructure continued and intensified, with full-year forecasts for total credit issuance tied to financing AI ambitions rising 15% from the levels predicted at the start of the year.

Fundamentals indicate healthy performance of credits tied to borrowing by corporations, consumers, and commercial real estate operators. Default rates of high-yield corporate bonds and loans sit near their longer-term averages. Measures of private credit default activity fall in a range of 3% to 5%, higher than recent lows but consistent with long-term averages. Many types of consumer loans – including credit cards, autos, unsecured loans, and home improvement loans – report default and delinquency rates consistent with historical experience. Commercial real estate loan performance has steadied, with banks reporting minimal charge-offs and losses. Credit performance in SASB deal structures has normalized, with delinquency rates stabilizing and losses remaining low.

Prolonged periods of low credit spreads and subdued volatility are not new to the fixed income markets. In these environments, we find that executing a selective, bottom-up selection process can help investors perform through the inevitable spread widening that will occur. Though no one knows when or why spreads will widen, we believe investing in durable credits² with careful attention to valuations, appropriate debt structuring, transparency afforded to investors, and the caliber of management serve investors’ long-term interests well regardless of the prevailing environment.