Income Plus Strategy

Hannah: Hi, Janet. Well, let's dive right in by providing viewers with a recap of what we saw in fixed income markets in the third quarter.

Janet: Sure. Well, in the third quarter, we saw interest rates fall and credit spreads narrow—both of which created tailwinds for bond investors and, as a result, if you had duration and credit in your portfolio, you did well in the third quarter along with really any risk assets. That's especially notable given the uncertainty we've been highlighting over the past few quarters has not gone away. The markets have seemingly been able to shrug off shocks, including rising geopolitical tensions, political dysfunction, and even threats to the Federal Reserve's independence. And given all those attention-grabbing headlines, investors could be forgiven for overlooking the fact that 2025 has actually been a very strong year for fixed income so far. For the year-to-date period through the end of September, the Bloomberg U.S. Aggregate Bond Index, for example, has posted the strongest returns since 2020. It does remain an open question, however, if the market's confidence can last.

Hannah: So, that all sounds like good news for bond investors so far in 2025. But, with the good, there must be something to keep an eye on. So, what should investors be looking out for in the fourth quarter?

Janet: Well, we continue to think that credit compensation—or actually lack thereof—is something to be mindful of. In the third quarter, we saw that the U.S. Investment Grade Credit Index spread hit 68 basis points (bps; 100 bps equal 1.00%) over Treasuries. That's a level we have not seen since December 1997. While solid fundamentals and a very strong technical picture are still supportive of credit, there’s clearly little room for continued tightening. So, we think this is not the environment where investors should be reaching to the bottom of the credit barrel, so to speak; rather, they should be looking for risk that they are being compensated for. We think this is the environment that calls for positioning portfolios for resiliency.

Hannah: So, how should investors be thinking about packing their portfolios with resiliency in the current environment?

Janet: We think it's critical that investors take advantage of the attractive all-in yields and substantial yield breakevens that are available today. A yield breakeven is an estimate of how much yields could rise, or credit spreads could widen, before a fixed income investment would see negative total returns for the following year. So, prioritizing sectors that maximize yield breakevens—think things like short double-B rated high yield bonds or securitized credit, just to name a couple—can really help buoy portfolios should we see adverse market events.

Hannah: So, we should try to be yield choosers rather than yield chasers right now.

Janet: Well said, Hannah.

Hannah: Awesome. Well, thank you so much, Janet, for your time and insight today—looking forward to catching up after Q4!