First Quarter Outlook Chart

The first quarter of 2026 marked the strongest start to a year on record for investment grade (IG) corporate bond issuance, driven by a surge in AI-related borrowing. Large technology firms, known as hyperscalers, tapped capital markets to fund significant datacenter investments. While hyperscalers have historically represented ~1% of total IG issuance, their share rose to 6.8% in 2025 and 11.2% in Q1 2026.

 

This activity is reshaping the composition of the corporate bond market. As of the end of Q1 2026, Oracle has $120 billion of debt outstanding, followed by Amazon and Meta at $65 billion and $59 billion, respectively. Continued elevated issuance could exert pressure on spreads within tech and potentially spill over into the broader investment grade market.

Hyperscaler Debt

In equity markets, performance in recent years has been driven largely by hyperscalers and semiconductor designers/manufacturers. Fixed-income investors should be mindful that exposure to these same structural growth drivers is increasingly prominent in the bond market as well.

Q1 Recap: Income Remains Attractive Despite Rate-Driven Headwinds

  • Rising Treasury yields drove modestly negative returns across most fixed income sectors during the first quarter, with longer-duration assets most affected.
  • Treasury yields increased across the curve, led by intermediate-maturity bonds.
  • The Bloomberg U.S. Aggregate Bond Index (the Agg) posted a small loss of -0.05%. Mortgage-backed securities (MBS) and asset-backed securities outperformed Treasuries and corporates.
  • Credit spreads widened across both investment grade and high yield markets as volatility increased and risk appetite softened.
  • High yield returns were pressured by significant spread widening, especially in lower-quality and cyclical sectors. The high yield default rate rose slightly to 2.6%.
  • Municipal bond returns were negative across all maturity segments, with long-duration municipals lagging amid higher interest rates.

Market Summary

Fixed income returns were modestly negative across most major sectors in the first quarter as rising interest rates weighed on performance. Higher starting yields helped cushion volatility, but duration exposure detracted overall.

YIELDS & RETURNS (%) 1

U.S. Treasury Market

Treasury yields moved higher across the entire curve during the quarter, with the largest increases occurring in the intermediate maturities (2-10 years).

TREASURY YIELDS (%) 1

Treasury returns were positive on the front end and negative across the intermediate and long ends of the curve.

TREASURY RETURNS (%) 1

Investment Grade

The U.S. Aggregate (the Agg) generated a modest loss in the quarter. The underlying sectors within the Agg posted mixed results, with corporates producing absolute losses and underperforming Treasuries. Mortgage-backed and asset-backed securities were relative bright spots within the Agg.

INVESTMENT GRADE INDEX & SECTOR RETURNS (%) 1

Investment grade spreads widened across corporates and current coupon MBS over the quarter. Spreads remain tight vs. long-term averages.

INVESTMENT GRADE SPREADS (basis points) 1

Returns across investment grade (IG) corporates were broadly similar by rating, with all ratings categories posting modest losses in both absolute and excess terms.

INVESTMENT GRADE CORPORATE CREDIT QUALITY RETURNS (%) 1

Spreads widened across all investment grade sectors in the quarter. Financials and technology experienced the largest widening. The tightest-trading sectors are capital goods and consumer non-cyclicals.

INVESTMENT GRADE CORPORATE BOND SPREADS BY SECTOR (basis points) 1

Hight Yield

High yield returns were negative across all rating categories, with lower-quality credits underperforming. Rising Treasury yields and meaningful spread widening more than offset coupon income.

HIGH YIELD SECTOR RETURNS (%) 1

HIGH YIELD OPTION-ADJUSTED SPREADS (OAS) (basis points) 1

High yield spreads widened significantly across most sectors, reflecting increased risk aversion. Transportation, technology, and financials experienced the most pronounced spread expansion, while energy was the only sector to realize tighter spreads.

HIGH YIELD CORPORATE BOND SPREADS (OAS) BY SECTOR (basis points) 1

High yield defaults over the past 12 months increased modestly during the quarter, causing the issuer default rate to rise to 2.6%.

HIGH YIELD DEFAULT RATES 2

Municipals & Other

Municipal bonds posted negative returns across all maturity buckets, with longer-duration segments declining the most.

MAJOR MUNICIPAL BOND INDEX RETURNS (%) 1

MUNICIPAL YIELDS BY RATING CATEGORY AND MATURITY (%) 1

AA MUNICIPALS – HYPOTHETICAL AFTER-TAX YIELDS BY EFFECTIVE TAX RATE (%) 3

Returns in “other” sectors were mixed, with U.S. convertibles outperforming. Emerging market debt, global bonds, and preferred stocks lagged as global rates moved higher.

OTHER SECTOR RETURNS (%) 1,4

Bond Rating Categories

Standard & Poor’s Ratings Group

AAA An obligation rated “AAA” has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.

 

AA An obligation rated “AA” differs from the highest rated obligations only in small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.

 

A An obligation rated “A” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher- rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.

 

BBB An obligation rated “BBB” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

 

Obligations rated “BB,” “B,” “CCC,” “CC” and “C” are regarded as having significant speculative characteristics. "BB" indicates the least degree of speculation and “C” the highest. While such obligations will likely have some quality and protective characteristics, these Q1 be outweighed by large uncertainties or major exposures to adverse conditions.

 

BB An obligation rated “BB” is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

 

B An obligation rated “B” is more vulnerable to nonpayment than obligations rated “BB,” but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.

 

CCC An obligation rated “CCC” is currently vulnerable to nonpayment and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.

 

CC An obligation rated “CC” is currently highly vulnerable to nonpayment.

 

C A subordinated debt obligation rated “C” is currently highly vulnerable to nonpayment. The “C” rating Q1 be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued.

 

D An obligation rated “D” is in payment default. The “D” rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payment will be made during such grace period. The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.

 

1 Source: Bloomberg.

2 Source: Bank of America Merrill Lynch.

3 Hypothetical yields are calculated as the AA municipal yield divided by (1-tax rate). Actual tax-adjusted yields will depend on individual tax circumstances.

4 Source: Standard & Poor’s.