Wealth Insights

Bonds Commentary

Bonds: Still Stuck Between A Rock And A Hard Place

June 2026

Fixed income investors received a welcome reprieve from the relentless rise in rates as hopes for a U.S./Iran deal forced crude oil prices lower late last month, and that rally in the final days of May allowed the Bloomberg U.S. Aggregate (Agg) Bond index to eke out a 0.3% monthly gain. Investors in higher quality bonds have encountered tough sledding ever since yields bottomed in late February as a rapid rise in energy prices has left inflation expectations in-flux and kept sustained upward pressure on longer-term Treasury yields. The benchmark Bloomberg U.S. Aggregate (Agg) Bond index, which is entirely investment-grade, closed out May with a meager 0.4% year-to-date gain, due largely to the fact that the Agg is dominated by U.S. Treasuries and various government-related bonds, which in total account for just over 50% of the index.

Energy prices fell into month-end amid hopes the Strait of Hormuz would reopen and shipping traffic would normalize in the near term, which took some of the upward pressure off the long end of the Treasury curve as market participants inferred that inflation expectations would likely moderate. However, we don’t expect yields to fall much from here as even a sustained drop in energy prices and inflation expectations would likely result in an upward bias to expectations for economic growth, both in the U.S. and abroad, thus keeping yields anchored near current levels.

Treasuries and higher quality bonds broadly remain valuable components of a diversified fixed income portfolio, but these bonds often carry longer duration profiles and greater interest rate sensitivity. As a result, persistent volatility in prices of energy and other commodities – a reasonable base-case given the ongoing stalemate in the Middle East - could contribute to heightened volatility and potentially price declines for these bonds. As a result of this view, we currently maintain exposures in-line with our strategic long-term target exposures to higher quality investment grade, U.S. high yield, international developed market sovereigns and emerging market debt as we see upside risks to yields across the board and desire to keep our powder dry as we look for dislocations at the sub-asset class level.

Still Relatively Constructive On Credit, But Expectations Should Be Tempered. Higher quality corporate bonds have fared a bit better than Treasuries year-to-date, with the Bloomberg U.S. Corporate index rising 0.7% through May as historically tight credit spreads have been offset by the move higher in Treasury yields in the 5-to-10-year portion of the yield curve. Through May, high yield corporate issues had outperformed investment-grade corporates by 1% year-to-date, and the credit spread over the Treasury curve closed out the month at 257-basis points, 72-bps below the widest level seen in late March and just 9-bps above the tightest levels seen this year.

Given the U.S. High Yield index carries a yield-to-worst of almost 7%, and with inflation unlikely to move much lower in the near-term, the asset class is likely to continue garnering interest from investors seeking income in excess of inflation to preserve purchasing power. However, credit spreads are unlikely to move much lower from here with a more uncertain outlook for the U.S. and global economy in place, thus limiting total return potential from this segment of the fixed income market. We maintain an allocation to high yield bonds in-line with our strategic benchmark as we don’t envision a sizable near-term uptick in defaults, but expectations should be tempered and we are still looking for a coupon-minus return over the balance of this year.

As of June 10, 2026