Fixed Income

Chasing Duration Has Been a Fleeting Strategy

The Middle East war has proven to be an important pivot for the Treasury (UST) market. Flight-to-quality buying emanating from private credit fears pushed UST yields to their year-to-date lows in late February, but since the first headlines surrounding the war “hit the tape,” rising energy prices have fueled a complete reversal with rates rising by roughly +70 basis points (bps) to +85 bps depending on the maturity. As a result, the 2-year and 10-year yields peaked out at 4.23% and 4.67%, respectively.13

While crude oil prices had retraced the lion’s share of their war-related increase, UST yields have declined more modestly from their high watermarks. The shifting market expectation of rate cuts to rate hikes has clearly played a role in the UST market’s behavior, with the 2s/10s yield curve flattening by almost 50 bp as rate-hike speculation hit a fever pitch in the two-year sector. In contrast, the 3-month/10-year curve actually steepened at one point by 70 bp as the T-bill yield was anchored to the actual Fed funds rate while the 10-year yield rose.14

Much like upcoming Fed policy decisions, future yield developments will be highly data dependent as well. While there seems to be some debate as to what the Fed’s ‘new’ forward guidance approach will have on the UST market, in our opinion, it won’t reduce volatility, but could potentially increase it, as the broader money and bond markets react to each piece of incoming data that may influence policy decisions. However, our economic backdrop of moderate growth and above Fed target inflation keeps the UST 10-year yield in a fair-value trading range of 4%–4.50%, with potential to overshoot the top of this band.

Against this backdrop and given the track record for long duration over the last two-year period, as well as our macro outlook and relative value analysis, we would hold off on the “long duration” trade and recommend a barbell approach for fixed income portfolios.

Fixed Income Allocation

At the start of 2026, we argued that with lower yields and tighter valuations across many sectors, investors should temper return expectations and view income, not price appreciation, as the primary driver of fixed income returns.

Broadly, that view has played out. As rates drifted modestly higher over the first half of the year, investors benefited from a more conservative duration stance while continuing to capture attractive all-in yields across corporate and securitized credit.

That simple income narrative, however, understates the volatility investors experienced, particularly during February and March. Concerns surrounding AI-related investment spending, private credit jitters, and the outbreak and escalation of the Iran conflict all hit in quick succession. Treasury yields first declined and then reversed sharply higher. Credit spreads widened before retracing, while inflation expectations rose alongside energy prices before easing as geopolitical tensions de-escalated. Investors were rewarded for allocating to strategies such as U.S. dollar bullish currency strategies, which benefited from heightened uncertainty. Those investors who looked through the volatility and remained focused on fundamentally resilient credit markets found attractive opportunities to add exposure at compelling levels.

Our core view has not changed. The U.S. economy continues to show resilience, corporate earnings remain on solid footing, and inflation expectations, while still elevated, are largely anchored. But markets rarely move in a straight line, and the near-term backdrop has plenty of moving parts.

The Iran conflict is a good example. Some markets are beginning to look through it, but it would be premature to call it a non-issue yet, and it will likely hang over sentiment for some time, complicating decisions for both policymakers and investors. Add to that the new Fed leadership's deliberate shift away from forward guidance, and investors have one more variable to navigate without the benefit of a clear roadmap.

However, once the dust settles, we would expect longer-term Treasuries to remain range-bound at these higher levels, with elevated but anchored inflation expectations defining the ceiling and a resilient economy underscoring the floor. In that kind of environment, the path to strong fixed income returns runs through income. Finding differentiated sources of income across sectors, structures, and geographies is where we see the real opportunity.

Current Positioning: All About the Yield, Income Remains Key

Within fixed income, we remain confident in our current positioning, which reflects a deliberate balance between income generation and capital preservation.

• • • Duration: NEUTRAL We maintain a neutral duration stance, rooted in our conviction that long-term rates are likely to remain range-bound while shorter maturities offer greater opportunity, given the market’s recent repricing of policy expectations. Overall, this positioning provides flexibility. We remain generally underweight Treasuries.

• • • Credit Exposure: NEUTRAL with an Income Tilt While tight valuations limit scope for further spread compression, all-in yields across both investment-grade and high-yield corporates remain attractive. Corporate fundamentals are healthy, and we continue to favor investments in quality-screened high-yield debt over longer-duration investment-grade corporate bonds.

• • • Securitized Assets: OVERWEIGHT We retain a modest overweight to securitized credit, where a broad opportunity set, structural protections, and high-quality underlying collateral continue to offer attractive risk-adjusted returns. Investments in non-agency residential mortgage-backed securities and commercial mortgage-backed securities are particularly attractive alongside agency mortgage-backed securities.

• • • Emerging Markets Local Debt: NON-CORE POSITION Emerging market local debt remains an attractive source of income, supported by solid macroeconomic fundamentals. We continue to favor overweight positions to select Latin American countries..

• • • Municipal Bonds: OVERWEIGHT Within tax-sensitive accounts, we continue to favor municipal securities. After-tax income remains compelling and credit fundamentals across the sector remain solid.

Risks to the Outlook

Recent market conditions reinforce the importance of remaining nimble as risks evolve. The ability to identify and respond to risks as they develop is just as important as getting the broad macro thesis right. The shifting dynamics of the Iran conflict and the new Fed leadership’s evolving policy posture are just two prominent examples of the uncertainty investors are currently navigating. Elevated sovereign debt burdens are a global challenge, not simply a U.S. fiscal issue, yet markets have remained relatively complacent in demanding additional yield compensation. Meanwhile, the rapid expansion of corporate debt financing associated with AI-related investment has attracted greater scrutiny but continues to accelerate. These imbalances have a way of being absorbed until a catalyst forces a reassessment. Maintaining a diversified, income-oriented, tactically flexible posture remains the most prudent way to manage through it.

13 Bloomberg, 6/26/26.

14 Ibid.