This Portfolio Management Outlook is excerpted from the Fourth Quarter 2026 Fixed-Income Sector Views.

Higher starting yields, solid growth, and limited scope for Treasury yields to move materially higher create an appealing environment for fixed income. Our baseline U.S. economic outlook calls for real gross domestic product to grow slightly more than 2 percent this year and into next. Consumer spending will likely moderate as tax refunds deplete, wage growth cools, and high gasoline prices erode purchasing power, but a stable labor market should provide a floor. Our baseline view sees the Federal Reserve (Fed) lifting rates in December to 4.125 percent and then holding rates constant until there is a clear moderating trend in core Personal Consumption Expenditures inflation. Still, the economy relies on AI investment, and any decline in the outlook for that spending poses a risk to our view.

Our investment approach is guided by several key dynamics: yields are attractive at their highest levels since 2007, with what we believe is limited scope for Treasury yields to move materially higher; credit spreads in many sectors remain near all-time tights; and credit fundamentals are strong overall but weakening in industries more exposed to tariffs, technology shifts, and interest rates.

In this environment, our positioning emphasizes income generation and diversification. We prefer high carry instruments within defensive sectors, including senior commercial ABS and non-Agency RMBS, where complexity provides excess premium. Within corporate credit, we remain up in quality.

The Treasury yield curve has flattened, with the market now pricing in more rate hikes than even the most hawkish Federal Open Market Committee participant and with the Treasury accelerating its long-end buybacks. We think much of the repricing is behind us and are positioned for a slight re-steepening. We continue to believe Treasury Inflation-Protected Securities offer a compelling risk-reward profile, providing meaningful upside if the Fed hikes less than currently priced in and a durable hedge if inflation reaccelerates.

The economy remains resilient, the Fed has positioned itself as a determined fighter against above-target inflation, and term premiums remain elevated from concerns over government debt levels, which leave us to navigate increased volatility and an array of tail risks to our base case. Against this backdrop, we believe rigorously vetted higher quality credit offers attractive yields, potential price appreciation, and portfolio ballast to weather the range of outcomes.