Fixed income SMAs

Returns across the U.S. investment grade fixed income market were positive during the third quarter of 2025, continuing what has been a solid year for high quality bonds.

Interest rates declined, led by the front-end of the yield curve, as the Federal Reserve resumed its monetary policy easing cycle. Income production was once again the main contributor to returns and continues to be a key driver for the asset class moving forward.

Tax-free municipals led all sectors during Q3, reversing what had been underperformance early in the year. Attractive valuations, particularly for longer-duration municipal bonds, helped drive steady inflows into the market. These inflows largely absorbed the continuation of elevated new issue supply and created a positive technical backdrop. Credit quality has remained strong as municipalities are taking advantage of robust tax-receipts to strengthen their financial profiles.

Corporate bonds also performed well, providing positive excess returns versus government bonds. While valuations are considered rich with credit spreads near the tightest level on record, attractive absolute yield levels are driving demand from both domestic and global investors. Like municipals, credit quality across the corporate sector has been healthy.

Looking forward, we remain constructive on high quality fixed income. Yields are trading above current levels of inflation, which creates positive real income for investors. The Federal Reserve is forecasting additional cuts to the Fed Funds Rate during Q4 and into 2026, which provides a positive backdrop for the market. In addition, we believe that should financial market volatility increase, the sector will exhibit negative correlation versus other areas of the financial markets.

Our strategies and portfolios continue to be positioned with a quality bias, comprised of individual bond holdings that have stable credit profiles. As always, if dislocations arise, we may look to take advantage of trading opportunities to either add yield, capture tax losses, or both. While market volatility can present angst to investors, it can also present opportunities that can add value for years to come.