Highlights
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Q3 2026 Taxable Fixed Income Commentary
The Bloomberg U.S. Aggregate Index returned -3.5% during third quarter 2026 as interest rates rose to their highest levels since 2006. It was the fourth-worst performing quarter over the past 40 years, with the first three quarters of 2022 occupying the top three slots. Every fixed-rate sector with at least one year to maturity experienced negative returns during the quarter. Loans and collateralized loan obligation (CLO) debt indexes experienced positive returns as their floating-rate features helped preserve capital during the quarter. The Bloomberg U.S. Aggregate Index’s year-to-date return turned negative, with only shorter duration segments experiencing positive year-to-date returns.
The Federal Reserve (the Fed) raised the target range for the federal funds rate by 0.25% to 3.75% - 4.00% during the quarter, citing elevated inflation. It was the Fed’s first interest rate hike since July 2023. Market participants priced in a more aggressive pace of future Fed rate increases through 2027.
While rising interest rates affected total returns of the high-grade bond markets, credit performance was generally flat to positive with one notable exception. Agency mortgage-backed securities (MBS) underperformed Treasuries by a significant margin, as the sector experienced duration extension and spread widening. We believe the quarter served as a stark reminder of the importance that a valuation discipline can play when assessing a bond’s attractiveness. We do not find agency MBS at higher spreads to be attractive yet, despite its recent underperformance. We find less than 0.1% of the 30-year MBS market meet our Valuation Framework’s1 criteria for purchase, while no cohort of the 15-year MBS market screens favorably.
Issuance has been robust year to date. High-grade corporate bond issuance is up 26% year over year, while volumes of asset-backed securities (ABS), nonagency commercial mortgage-backed securities (CMBS), and middle-market CLOs increased 8%, 10%, and 16%, respectively. High-yield credit issuance has been mixed. Loan volumes are down 9% year over year while bond issuance increased 2%. Broadly syndicated loan (BSL) CLO new issuance is down 20% with the decline in loan volumes.
The bond markets continue to be vital for financing the construction of digital infrastructure and companies’ capital expenditures tied to artificial intelligence (AI). Bank of America estimates there has been over $535 billion of issuance across corporate issuances, ABS, and CMBS. This is a remarkable increase from the beginning of the year, when estimates suggested $450 billion in full-year issuance across those markets. The proportions of year-to-date investment grade corporate bond and ABS issuance tied to AI increased to 19% and 9%, respectively, from 16% and 8%, respectively, in 2025. The corporate credit market accounted for over $500 billion of the issuance, spanning a diverse set of sectors and industries. This included $85 billion of “project finance” bonds – off-balance sheet arrangements to finance the construction of data centers where a hyperscaler will be the sole tenant and occupy a long-term lease.
Credit market participants are demanding higher spreads to finance issuances tied to digital infrastructure and AI. The average credit spread of hyperscalers’ bonds increased 47 basis points (bps)2 over the previous twelve months, while the average credit spread of project finance bonds increased 78 basis points since October 2025. This contrasts with an increase of only 9 bps over the trailing year for the Bloomberg U.S. Corporate Index. In the structured credit markets, spreads of data center ABS increased 39 bps and data center CMBS increased 81 bps over the past year, while the spread of the Intercontinental Exchange (ICE) Bank of America AA-BBB Miscellaneous ABS Index decreased 26 bps. At current spreads, there are opportunities emerging, though careful consideration of the bond’s durability, structure, and management are imperative. We remain selective about where we are leaning into this sector.
Credit valuations improved during the quarter as spreads widened marginally. The percentage of investment-grade corporate bonds that met our Valuation Framework’s criteria for purchase increased slightly to 7%, while the percentage of high-yield corporate bonds meeting the criteria increased to 24% from 22% last quarter. The loan market remains attractive with 53% screening as a “buy” candidate, but that amount decreased from 62% last quarter. Less than 0.1% of the agency MBS market meets our criteria for purchase. Spreads of nontraditional ABS decreased towards the lower end of their historical range, and spreads of CLO debt decreased slightly during the quarter. CMBS spreads widened slightly and sit closer to their historical medians. Private credit-related debt spreads were mixed during the quarter. Business development company (BDC) corporate bond spreads decreased slightly while middle-market CLO spreads increased slightly. Although higher than recent lows, spreads of both sectors sit near the lower ends of their historic ranges.
Despite most of the market’s valuations screening unfavorably, pockets of opportunity remain. Nearly 40% of shorter maturity bonds screen as “buy” candidates, and nearly 50% of specialty finance and life insurance companies meet our criteria for purchase. There are abundant opportunities in communications-related high-yield loan and bond issues. We found selection opportunities in several technology-related high-yield bonds and loans and BDC bonds during the quarter. Over 50% of bonds of high-yield finance companies and automotive companies screen favorably. In the structured credit sectors, several nontraditional ABS sectors continue to offer elevated spreads that sit above their historical medians. We found opportunities in bonds of data center ABS, personal consumer loan ABS, billboard ABS, subprime auto ABS, and triple net lease ABS. Fixed- and floating-rate, AAA-rated, single-asset single-borrower (SASB) CMBS of all property types screen attractively. We found selection opportunities in CLOs of broadly syndicated loans and middle market loans during the quarter.
Credit fundamentals have steadied at normalized levels and are improving in many segments. Consumer credit delinquency and default rates are generally lower year-over-year and sit at or near long-term averages. Subprime auto loan delinquencies and defaults are running above long-term averages but at manageable levels. The default rate of high-yield bonds and loans declined to 2.3% and remain below long-term averages. The high-yield market distress ratio for bonds and loans rose over the past year but sits at its long-term average. Private credit default estimates converge in a range of 3% to 4%, higher than the recent past but at manageable levels.
Higher interest rates may test economic and market resiliency. Despite that, fixed income fund flows have been strong, credit issuance has been robust, and spreads remain compressed. Fundamentals appear healthy so far, though measures of consumer sentiment remain weak amid higher rates and inflation. The growth of issuance tied to data infrastructure and AI – and its future performance – could be one of the more profound developments impacting the credit markets in many investors’ lifetimes. It remains to be seen if all the AI-related issuance gets put towards productive use. We believe that our disciplined, bottom-up approach will help us navigate these developments and allow us to capture value for clients if disruptions emerge.
1 Our 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.
2 One basis point is equal to 1/100th of 1%, or 0.01%.
Past performance is no guarantee of future results.
Index Definitions
Ice BofA U.S. Corporate Index tracks the performance of USD denominated investment grade corporate debt publicly issued in the U.S. domestic market.
Bloomberg U.S. Corporate Bond Index represents the corporate bonds in the Bloomberg US Aggregate Bond Index, and are USD denominated, investment-grade (rated Baa3 or above by Moody’s), fixed-rate, corporate bonds with maturities of 1 year or more.
Bloomberg U.S. Aggregate Bond Index covers the USD-denominated, investment-grade (rated Baa3 or above by Moody’s), fixed-rate, and taxable areas of the bond market. This is the broadest measure of the taxable U.S. bond market, including most Treasury, agency, corporate, mortgage-backed, asset-backed, and international dollar-denominated issues, all with maturities of 1 year or more.
Uniform Mortgage Backed Security (UMBS) means a single-class MBS backed by fixed-rate mortgage loans on one-to-four unit (single-family) properties issued by either Enterprise which has the same characteristics (such as payment delay, pooling prefixes, and minimum pool submission amounts) regardless of which Enterprise is the issuer
“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 BBH Strategy. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to the fund.
Index performance is not illustrative of the performance of any BBH investment product. The Indexes are not available for direct investment.
Risks
Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, maturity, call and inflation risk; investments may be worth more or less than the original cost when redeemed.
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.
Basis point is a unit that is equal to 1/100th of 1% and is used to denote the change in price or yield of a financial instrument.
Traditional ABS include prime auto backed loans, credit cards and student loans (FFELP). Non-traditional ABS include ABS backed by other collateral types.
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 speculative in nature and are vulnerable to the possibility of issuer failure or business interruption. High yield bonds, commonly known as junk bonds, are subject to a high level of credit and market risks.
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. References to specific securities, asset classes, and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations.
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. 2026. All rights reserved.
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IM-19299-2026-10-14 Exp. Date 01/31/2027
