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Insights & Education

Piton Webinar: Q2 2026 Fixed Income Update and Outlook

  • Aug 13
  • 11 min read

Welcome to Piton Investment Management's 2026 mid-year fixed income update and outlook with CIO Brian Lockwood. The first half was defined by the Iran war and its effects on energy markets and Fed policy. The Fed held rates steady at 3.50-3.75% all year, but dissents grew louder, from 8-4 in April, Powell's last meeting as chair, to 9-3 in July under new Chair Kevin Warsh, with three officials now pushing for a hike. The 10-year Treasury hit an 18-month high of 4.75% in July before easing on renewed Iran-Oman shipping talks. CPI eased from 4.2% in May to 3.5% in June, but bonds gave back ground in July. The Bloomberg Aggregate fell 1.30%, pulling year-to-date returns negative. This morning's July jobs report added a twist, payrolls fell 23,000, unemployment ticked down to 4.1% only as workers left the labor force, and prior months were revised down 103,000. Today, Brian reviews the first half and looks ahead.



Recorded August 7, 2026


Q1: Q2 closed with the Bloomberg U.S. Aggregate returning 0.69%, capping a first half where Q1 was essentially flat, but July gave much of that back, falling 1.30% and pushing year-to-date returns negative. What drove Q2's gain, and what changed in July?


It's been an interesting year for fixed income in general. What started off as a pretty good year turned into bonds eroding and performance eroding for the last six months. As you mentioned, it's been very much a part of the Iran war situation that we have had going on. Interestingly and beneficial to fixed income, if you think about the year 2022, where we had bond prices falling and yields rising - right now, we have yields rising to the tune of the two-year up 75 basis points and the longer end up 40 basis points. That's a pretty big move in rates. But because of the high yields we have had, the coupons are buffering fixed income. So fixed income is more flat year-to-date. If you remember in 2022, we had that kind of move, and we had big negative returns. That is because rates were much lower to start the year. We do have a buffer with fixed income right now, but we have seen a big drop in prices and rising yields. And it is really due to the war. Macro markets have been really myopic, if I could say that. When you think about what has been driving markets, it has really been this war, which has been driving oil prices, which has been driving inflation, which is driving interest rates, and that is even driving the Fed. It is really a one-stop shop catalyst right now for macro markets.


Bond Market Performance — Q2 Gains vs. July Reversal

  • Bloomberg Aggregate up 0.69% in Q2, but July fell 1.30%, pushing YTD negative

  • Iran War is the dominant driver, pushing yields up (2-year +75 bps, long end +40 bps)

  • High starting yields are buffering losses, unlike 2022

  • War is driving oil, inflation, and rates almost as one catalyst



Q2: The Fed held rates steady at 3.50-3.75% at every meeting this year, but the dissents shifted from 8-4 in April to a unanimous 12-0 in June to 9-3 in July, with three officials now pushing openly for a hike. How should investors read this progression under the new Chairman?


A new Fed chairman coming in - one of the main things is he wants to tackle inflation. There have been 60 months of inflation that have been over the two percent limit that they would like to see. They have to tackle that. They do need some time on that. He has been putting some committees together. We are going to get Jackson Hole next month, followed by a meeting. But what is interesting right now is the Fed's dual mandate has become somewhat singular and the notion that they really have to focus on inflation right now. Despite today's bad number and a couple of lower employment numbers, if you look at the average over the three months, we are still at near full employment here in the U.S. So, it is not a big worry for them in that situation, but this might have bought them some time, and the fact is they really want to tackle inflation. So, their message was hawkish. And I think they could sway into a tightening zone, although there is a really good chance that we could see the Fed on hold for some time as CPI comes out next week and we get some numbers that give them some time to wait and see.


Fed Policy Under New Chair Kevin Warsh

  • Rates held at 3.50–3.75%; dissent grew from 8-4 in April to 9-3 in July

  • New Chair Warsh is prioritizing inflation, above target for 60 months

  • Near full employment gives the Fed room to focus on inflation

  • Hawkish tone, but a hold is possible pending next week's CPI



Q3: CPI ran from 2.4% in February up to 4.2% in May before falling back to 3.5% in June as the Iran ceasefire briefly reopened Hormuz, and core PCE eased to 3.3% in June from a peak of 3.4% in May. Is the inflation shock behind us, or could renewed fighting since quarter-end undo this progress?


I do not think inflation is behind us. And obviously the million-dollar question is what is the duration of the war and how does that drive oil prices? The reason why oil is important is because it is not necessarily oil in particular, but it is what it turns to, how it drives regular inflation. If we saw an employment number today, employment inflation is not rising. And our last PCE numbers were a little bit tamer, but it is the goods that are being driven, it is the food that is being driven, it is all of those things that drive inflation. I do think this Fed would love to have talked about transitory inflation from the war, but you can not do that if you remember what happened to the last chairman when we looked at transitory inflation.


Inflation Outlook Amid Renewed Iran Conflict Risk

  • Inflation is not behind us; war duration and its oil impact remain the key unknown

  • Oil flows through to broader goods and food inflation, not just energy

  • Employment-driven inflation has not been rising, and PCE has been tame

  • Fed is wary of calling inflation "transitory" given the last chair's experience



Q4: June payrolls were revised down to just 20,000, and this morning's July report showed payrolls falling by 23,000, well below the roughly 85,000 expected, with unemployment ticking down to 4.1% only as more workers left the labor force. How are you weighing this sudden labor weakness against the Fed's more hawkish tilt?


The hawkish tilt is still warranted, given the fact that inflation has been elevated and over the Fed’s two percent goal. But when you see a continuous string of lower employment numbers, you do see the fact that maybe it is not affecting employment inflation, which is a good sign, which might buy some time for the Fed. But still, given the fact that we are close to full employment here in the US, we have a GDP report that is probably coming out pretty strong this quarter. They have to focus on that inflation part.


Labor Market Weakness vs. Fed's Hawkish Tilt

  • June payrolls revised to 20,000; July fell 23,000, well below the ~85,000 expected

  • Unemployment dipped to 4.1% only because workers left the labor force

  • Hawkish tilt still warranted with inflation above the 2% goal, and near-full employment leaves room to focus there




Q5: Investment-grade spreads ended Q2 near 79 basis points and high-yield near 280, both historically tight. Have those levels held since quarter end given the oil volatility, or are you seeing any cracks in credit?


In general, the corporate bond market has followed other risk markets year-to-date, and the idea that it has stayed, risk premiums have remained narrow, and spreads are still tight. And that's synonymous with an equity market that's still rising. Some of the things that we are seeing are in certain sectors with this hyper-scaling and data centers; we are seeing some massive supply coming to the market. Just yesterday, we saw a Google deal of $25 billion in a multi-tranche deal come to the market. It was four times oversubscribed and came at spreads that are historically low for high-grade credit. But we have seen a lot of these over the last few months, and not all of them have done well, depending on what markets are doing at the time and how people are thinking about hyper-scaling and all of that data. There has been some indigestion with the scope and the size of some of the deals that have been coming recently. And by the way, corporate issuance, which has been well received in general, is at the highest point of any year we have seen.


Credit Spreads and Signs of Stress

  • IG spreads near 79 bps, high yield near 280 bps, both historically tight, in step with rising equities

  • Heavy hyperscaler/data center supply stands out, including a $25B Google deal, 4x oversubscribed

  • Some large deals show "indigestion," but overall issuance is at the highest level on record




Q6: Municipal BBB and high-yield spreads tightened in Q2, closing at 94 and 183 basis points, on strong demand against record supply. How have munis fared over the year, and where do you see value in the market today?


In high-grade Munis, it is very interesting. There has been a lot of supply; it has been well received by markets, but there have been periods of overperformance and underperformance from month to month within the Munis sector. And some of it has to do with just the rich/cheap of where Munis lie and where people can buy taxable bonds versus buying the Munis. So, if you take a month like June, they vastly outperformed the taxable bond market. But because they had such outperformance in June, when July markets fell back down to earth in terms of bond prices, they underperformed wildly versus taxable markets. And it gets down to a sense of where is relative value. And we always like to say that if you look at a high-grade Muni and say it's 70% of a Treasury bond market, it is fair value. So, when it gets to 60, it is expensive. And when it gets to 80, it is a little bit more attractive. We're right in that zone. And so that's what you're seeing from month to month within the market of tax freeze.


Municipal Bond Performance and Relative Value

  • Muni BBB and high-yield spreads tightened to 94 bps and 183 bps in Q2

  • Performance swings monthly based on relative value vs. taxables

  • Munis outperformed in June, then underperformed in July

  • Rule of thumb: ~70% of Treasury yield is fair value, and munis sit right there




Q7: The 10-year Treasury has swung from around 4.2% in January to an 18-month high of 4.75% in late July and back to near 4.6% since quarter end. How are you positioning duration, credit quality, and cash allocations given this volatility?


It is a good question in terms of all the things we have talked about and how myopic the macro market is right now. We are about neutral within our duration range, which in our intermediate portfolios is right around three and three-quarters to four years in terms of duration. In terms of credit quality, we have sector rotated into more government bonds and corporate bonds. That is a big change from two years ago. And it is what we talked about before. Historically, we are seeing some credit markets that are very narrow, and you are not getting paid a lot to go down the corporate spread ladder. So, given that fact, we have been much higher in credit quality. And in terms of cash allocations, we are keeping them really low. The curve has steepened out, cash has outperformed fixed income year-to-date, but despite the fact that even if we do see a tightening cycle, we think it will be a very shallow tightening cycle and maybe even one that reverses. So, we would like to keep some duration on rather than have a lot of cash holdings in our portfolios.


Positioning: Duration, Credit Quality, and Cash

  • Duration is roughly neutral, around 3.75–4 years in intermediate portfolios

  • Shifted toward government/higher-quality corporate bonds vs. two years ago

  • Cash allocations kept low despite cash outperforming fixed income YTD

  • Any tightening cycle expected to be shallow, favoring duration over cash


Q8: Brian, with well over 30 years of experience managing fixed income portfolios and overseeing over $800 million in customized SMA portfolios for financial advisors and family offices at Piton, what is your outlook for fixed income heading into the second half of 2026? And what is on top of your mind?


I think there are a few things, and I think you have to look longer term to have these thoughts, but when you look at the 2020s, fixed income has not been a great asset class. Equities have been a fantastic asset class. But when you think about longer term out and you think about which market is historically cheap and which market is historically rich, you have to look at bonds and say there is a place for bonds and an asset allocation even for the next six months out, even if we are talking about a chance of a tightening cycle when we might not be, when we might, this war might be over, we might get through midterm elections, and you might see a normalization of yield curves and back to the thought of maybe even lowering rates in the future. So, what I see for fixed income is I see yield levels that are historically attractive for longer-term investors, and I see the potential for not just coupon clipping, but also capital appreciation in fixed income markets, despite the fact that spreads are sort of tight.


Second-Half 2026 Outlook

  • Fixed income has lagged equities in the 2020s, but yields look historically attractive now

  • Potential catalysts: war resolution, midterms passing, yield curve normalization

  • Outlook includes room for capital appreciation, not just coupon income

  • Bonds seen as historically cheap and deserving a real place in long-term allocations



Supporting notes at the date of recording (August 7, 2026):


This analysis is provided for educational purposes and does not constitute investment advice. Past performance does not guarantee future results. Consider your individual circumstances and consult with qualified professionals before making investment decisions.


Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively "Bloomberg"). Bloomberg or Bloomberg's licensors own all proprietary rights in the Bloomberg Indices. Neither Bloomberg nor Bloomberg's licensors approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.




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Disclaimer: This analysis is provided for educational purposes and does not constitute investment advice. Past performance does not guarantee future results. Consider your individual circumstances and consult with qualified professionals before making investment decisions.


 
 

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