Wealth Insights

Bonds Commentary

Bonds: Few ‘Fat Pitches’ In Fixed Income With Energy Prices Still In-Flux

May 2026

The 10-year U.S. Treasury yield made a year-to-date closing high in early May at 4.44% as energy prices continued to climb, serving to put upward pressure on sovereign bond yields abroad and necessitating intervention in the currency market by the Bank of Japan to support the yen. Brent crude oil, the global benchmark, made an intra-day high above $126 per barrel on April 30 as the ceasefire between the U.S. and Iran appeared to be on shaky footing, but has since backed off a bit and was oscillating between $100 and $110 per barrel at the time of this writing. However, even with energy prices coming off the boil somewhat, yields across the Treasury curve were higher in early May than they were at the end of April. This is largely a function of the longer energy prices remain elevated, the greater the likelihood that long-term inflation expectations become unanchored and recalibrate higher, which has led investors to require higher yields to compensate them for the risk of this potential outcome.

Yields on the short end of the Treasury curve have drifted higher alongside probabilities for rate hikes amongst foreign central banks in the past month, prompting fears that the FOMC would need to follow suit in response to elevated energy prices. In early May, the 2-year Treasury yield moved above the top-end of the Fed funds target range, trading to a year-to-date high of 3.96%, indicating that market participants believe the FOMC’s next move – whenever that may be - will be a hike, not a cut. But we don’t expect that to occur this year as the FOMC will be patient and maintain the status quo for as long as it can as it waits to see how the energy supply shock plays out. The FOMC’s wait and see approach appears justified at this juncture given positive readings on the state of the labor market, including the strong May employment report, which suggests the economy may not need further accommodation.

The backup in yields during April and into May leave U.S. Treasuries modestly more appealing relative to our ‘coupon-minus’ return view coming into this year. But with still little clarity regarding a potential timeline for a full reopening of the Strait of Hormuz, crude oil prices are likely to remain elevated and we would look to maintain a duration profile in line with that of the Bloomberg Aggregate Bond index as upward pressure on the long end of the Treasury curve could persist into the summer if not beyond. Compensation for taking credit risk remains paltry relative to historical standards but given our view that the U.S. economy is on relatively firm footing with corporate profits surprisingly strong, we see little reason to expect a meaningful uptick in near-term defaults. Exposure to credit sectors and non-U.S. bonds continue to warrant investor attention due to higher carry/yields and for diversification benefits, but allocations must be sized appropriately.

Still A Decent Backdrop For Credit, But Total Return Upside Limited By Tight Spreads. Below investment grade credit participated in the global risk rally in April, as the Bloomberg U.S. Corporate High Yield index more than recovered price declines incurred in the wake of the conflict between the U.S. and Iran as the index rallied 1.7% after its March drop of 1.2%. Option-adjusted spreads (OAS) finished April at 268-bps over comparable Treasuries, the lowest level for the index since mid-February. After the snapback last month, valuations are now just 18-bps off the 10-year lows, leaving little room for further price appreciation, but investors shouldn’t lose sight of the primary driver of return from bonds — income. Higher sustained rates in the Treasury market left benchmark yields for low-grade credit hovering around 6.9% at the start of May, roughly 50-bps above where they began the year. From an absolute return perspective, that’s a competitive expected return given the lower duration profile of the sub-asset class, suggesting it should be more insulated from inflationary shocks that could crop up as the conflict in the Middle East drags on. The case for credit exposure at this point in cycle is not substantial upside to total return driven by further credit spread compression because that appears limited, but high yield corporate bonds can be a valuable diversification component within a broader portfolio that provides a higher level of carry/yield than we’re currently seeing in higher quality assets.

As of May 14, 2026