Janet Rilling: 2025 Q3 Recap and Q4 Outlook
Janet Rilling and Hannah Rosencrantz give a Q3 fixed income market update—discussing strong bond performance, potential risks in credit compensation, and strategies for building resilient portfolios in Q4.
Transcript
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!
Key takeaways
- Bond markets performed strongly in Q3, driven by falling interest rates and narrowing credit spreads, despite ongoing geopolitical and economic uncertainties.
- Investors should be cautious of tight credit spreads, focusing on risks that offer adequate compensation rather than chasing lower-quality credit.
- Prioritizing sectors with attractive yield breakevens can bolster portfolio resilience against adverse market events.
Related insights
Fixed income benchmark construction has two fundamental flaws. First, exposures prioritize the needs of borrowers rather than investors. Second, this tends to expose investors to the biggest risks at the worst times.
Two of Allspring’s senior portfolio managers and high yield specialists, Chris Lee and Mike Schueller, sit down with Daniel Sarnowski to discuss recent volatility and why focusing on shorter-duration, higher-quality high yield assets could be the answer in uncertain markets.
Nick Venditti, Allspring’s head of Municipal Fixed Income, explains the impact of the recently passed One, Big, Beautiful Bill on our SpringTalk Muni Moments. And the good news for muni investors? It’s not bad news.
After a mid-April “tariff tantrum,” bond markets appear to be moving past trade headlines and turning their attention to upcoming tax policy and budget negotiations.
George Bory, chief investment strategist for Allspring Fixed Income, explains how active investing in fixed income can offer key advantages over passive investing by prioritizing investor needs, accounting for opportunity costs, and exploiting structural inefficiencies within the bond market.
Nick Venditti, head of Municipal Fixed Income, delves into the recent volatility in the fixed income markets in this episode of Allspring Muni Moments. With elevated yields and favorable muni-to-Treasury ratios, Nick highlights why now might be the time to explore municipal fixed income investments.
The market volatility following “Liberation Day” drove municipal yields to levels not seen since the Global Financial Crisis, presenting real opportunities for investors.
Bond markets are adjusting to tariff impacts amid economic uncertainty. Fixed income investments can help protect against downturns. Expect further yield curve steepening and sector rotation. Use “Riding the Curve” solutions to help maximize income and diversify duration.
Nick Venditti, head of Municipal Fixed Income at Allspring Global Investments, talks about how, for the first time in a while, the higher education sector is starting to show signs of distress.
Allspring fixed income experts George Bory and Nick Venditti recap an eventful start to the year. Trump took office again, wildfires raged in California, and the backdrop was set for a potentially volatile rest of the year. In this episode, find out what all that means for munis in 2025.