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Insights & Education

Piton Webinar: Q3 2026 Fixed Income Update and Outlook

4 days ago
12 min read

Welcome to Piton Investment Management's Q3 2026 fixed income update and outlook with CIO Brian Lockwood, covering a quarter that closed with the sharpest rates selloff since April, as the Fed raised rates for the first time since 2023, Brent crude climbed back above $105 a barrel, and Treasury yields hit multi-decade highs across the curve.



Recorded September 30, 2026


Q1: You wrote to advisors last Friday that the MOVE index, essentially the VIX for bonds, jumped roughly 30% on the week, its largest rise since April, as the 10-year hit 5.2%, its highest since 2007. How did fixed income perform?


Decidedly, fixed income had a really bad September and a historically bad quarter in general. September was certainly the cap of the quarter, and we saw indices fall anywhere from 3% to 5%, depending on what sector of investment grade fixed income it was. Overall in the quarter, when you look at some of the subsectors of fixed income, Treasuries were down about 3%, some corporate sectors were down about 5%, and Munis, which we will get into later, were down as much as 6% in a broad index. So, it was pretty bad overall performance from fixed income. But the beauty of the way the bond market works is that when there is a bad performance quarter, especially when it is duration-tied, it also means there are some advantageous yields out there for people to grab.


Performance: A Historically Bad Quarter for Bonds

  • September capped the quarter, with investment grade indices down 3–5% depending on sector

  • Treasuries down about 3%, some corporate sectors about 5%, broad Muni index as much as 6%

  • Duration-driven losses have created advantageous yields for investors to lock in




Q2: On September 16 the Fed voted 12-0 to raise rates a quarter point to 3.75%-4.00%, its first hike since 2023. Do you see a prolonged tightening cycle to commence?


I think we talked about this a little bit last quarter, but this is all tied to oil prices. This is all tied to Iran, and that is one of the linchpins to all of this. I do not necessarily see a prolonged tightening cycle, as long as we can get an end to this war at some point and oil prices come back down. That will calm the nerves about inflation running up. But right now, as long as inflation is above the 2% rate the Fed really wants to target, they are going to be in a tightening cycle. I do not think we will see another hike in October, based on the midterms and on some of the data that came out at the end of the quarter. But for right now, December looks like it is likely in the cards.


The Fed: A Hike Tied to Oil and Iran

  • The Fed's first rate hike since 2023 is tied directly to oil prices and the ongoing war with Iran

  • No prolonged tightening cycle expected if the war ends and oil prices come down, calming inflation

  • An October hike looks unlikely given midterms and recent data, but December is likely in the cards




Q3: Headline CPI held at 3.4% in August and core CPI slowed to 2.4%, its lowest since March 2021, yet core PCE sits at 3.3%, Brent is above $105, and consumers now expect 4.6% inflation. Where does inflation go?


Interestingly enough, we have had some good, or better-than-expected, inflation numbers coming in, including today, which is quarter end, September 30th. So, we will have to see whether it starts coming down. But as of right now, inflation is still not where the Fed wants it to be, or where our new chairman wants to get it to. He has made it pretty clear that he will continue to monitor this, and he looks at it as his game plan for how the tightening cycle will play out.


Inflation: Better Data, Still Above Target

  • Recent inflation readings, including September 30 quarter-end data, came in better than expected

  • Even so, inflation still sits above the level the Fed and its new chairman are aiming to reach

  • The chairman has made clear he will keep monitoring inflation as his game plan for further tightening




Q4: September flash PMI hit 58.4, the strongest since July 2021, and you called the 16 basis point move in the 10-year that day outsized relative to the data. Is growth what keeps the Fed tightening?


I think the thing with growth is that we have a pretty good economy. I know people talk about this K-shaped economy, where one leg of the economy is working really well and some of the others have stalled out, including housing. But regardless, the economic numbers are broad-based and pretty good, including potential GDP coming up. That lets the Fed focus on inflation being above target, and that is where the Fed has put all their cards. The key factor is employment, which has been robust. As the old saying goes, as long as people are employed, they will keep spending. Despite that, the other day we saw a consumer confidence number that was a 14-year low. So, we will have to see if that starts to play into the Fed's thinking. But right now, the part of their mandate they are focused on is just the inflation mandate.


Growth: Solid Economy Keeps the Focus on Inflation

  • Economy remains broadly solid despite a K-shaped recovery and stalled housing

  • Robust employment supports spending and lets the Fed focus on its inflation mandate

  • Consumer confidence at a 14-year low is worth watching for any shift in Fed thinking




Q5: Your note described a pronounced bear steepening, with the 5-year breaching 5% for the first time since 2007 and the 30-year near 5.50%, the highest since June 2004. How are you positioning duration?


For a long time, we have been neutral to our benchmarks on duration. That is really because we have this persistent inflation problem, but we are also wondering what is going to happen to the economy with the war and with the midterm elections. So, we have stayed right in that range. But now we are getting to levels where, when you think about it, you can buy a five-year Treasury that is above 5% and a seven-year Treasury that is above 5%. Those are securities that could live through two interest rate cycles, and 5% is about what you should expect as a return from safe fixed income. You are now getting that all in a coupon. So, it does make sense for us to start to gradually move out our duration and lock in some of these higher yields versus holding shorter bonds.


Positioning: Duration

  • Duration has been neutral to benchmarks amid inflation, war, and midterm uncertainty

  • Five- and seven-year Treasuries above 5% deliver safe fixed income returns in the coupon

  • Gradually extending duration to lock in higher yields versus holding shorter bonds




Q6: You flagged IG (investment grade) spreads near 80 basis points with yield-to-worst near a three-year high of 5.93%. Where do you see relative value?


There is definitely some relative value that has been created out of the third quarter of 2026, but it has not been in corporate bonds. In investment grade corporate bonds, spreads have remained pretty tight. They have widened a little bit over the quarter, and that is a bit of a supply story. We have heard about the Paramount bonds and the other big deals, and people are gobbling these up, but it is still a lot of supply for the market to digest. The market has digested it, and despite interest rates on three-year to 10-year maturities rising over 80 basis points, spreads have retained their relative tightness. The exception is the high yield area, where spreads have widened out. But investment grade spreads have remained pretty stable throughout the quarter. Corporate bonds still had bad performance due to duration.


Relative Value: Corporate Bonds

  • Q3 created value, but not in investment grade corporates, where spreads stayed tight

  • Spreads widened slightly on heavy supply, including large deals like the Paramount bonds

  • High yield spreads widened, while corporates still underperformed due to duration




Q7: The Muni index lost 1.81% last week and managers put $3.4 billion out for bid on September 23rd, the second-highest on record, yet Muni ETFs drew record inflows. Is the worst behind us?


Well, there is certainly a lot to talk about in the Muni market. By the way, in the quarter and in September, Munis were the hardest-hit investment grade sector, and we saw rates we have not seen in a long time. But I do think they will start to stabilize as people start to realize that they are getting longer-term yields. First of all, Munis are much cheaper on a relative value basis than their Treasury counterparts. But beyond that, they are getting to yields where you can start to say, "Hey, this is getting close to an equity-like return, and I am getting that in a Muni bond." So, you will see some stabilization in the market. Part of the story with Muni bonds has been supply. There has been a lot of supply hitting the market, and now we are starting to see some of the big deals pulled because rates have jumped up so high.


The other part of the story is something in municipal bonds that has grown much more popular over the last 10 or 15 years, called kicker bonds. These are basically callable bonds in the Muni market. These bonds, which might have a 4% or 5% coupon, are always assumed to be called at the shorter call date, maybe five or 10 years out. But when interest rates rise sharply, they are no longer likely to be called, so they become much longer-term bonds in a much more volatile market. Their price goes down a lot and their duration shoots up. That leaves managers, especially index managers, with a duration that has extended at one of the worst times. This is very similar to mortgage-backed bonds in the aggregate bond world. But in the Muni world, index managers are going to be forced to sell those bonds in order to keep their duration intact. I think we started to see that selling pressure in the third quarter. That might dissipate, but it might also create some opportunity, and it might create some tax-loss selling for some investors. Generally speaking, right now Munis are cheap, and we are not just talking about California, New York, and the other high-tax states. If you live in Texas or Florida, you can now get municipal bond portfolios at 85% of their taxable counterparts. Historically, that is pretty cheap for Munis.


Munis: Hardest Hit, Now Cheap

  • Munis were the hardest hit investment grade sector in September and the quarter, but should stabilize

  • Heavy supply and forced selling of callable "kicker bonds" by index managers added selling pressure

  • Munis are cheap beyond high-tax states, with Texas and Florida portfolios at 85% of taxable counterparts



Q8: With the Fed hiking, 3-month Treasury bills yield 4.24%, money market assets sit near $7.94 trillion, and the 2-year gives up only 31 basis points to the 10-year. How should investors think about cash?


Cash certainly has been king versus the bond market this year, and the third quarter had a lot to do with it. But depending on how shallow you think this rate-hiking cycle is, at some point cash will top out. And if interest rates stabilize, you are still getting a positive yield curve. If you remember, a few years ago we had a negative, or inverted, yield curve, where cash was yielding more than Treasuries. Right now, the yield curve is sloping positive, and you can pick up yield by extending out. Thanks to the third quarter, you can now pick up a lot more yield. So, I do think there is a balance. Cash is a great, safe investment, but by taking a baby step out the curve in safe investments, you can pick up some yield. And if things turn around, you have locked in that yield for longer.


Cash: Time for a Step Out the Curve

  • Cash has been king versus bonds this year, but it will top out depending on how shallow the hiking cycle is

  • Unlike a few years ago, when the curve was inverted, the yield curve now slopes positive, rewarding extension

  • A "baby step" out the curve in safe investments picks up yield and locks it in for longer if things turn around



Q9: Brian, with over 30 years managing fixed income and overseeing almost $1 billion in customized SMA portfolios for advisors and family offices at Piton, what's your sentiment heading into year-end as the Fed tightens into a strong economy?


To take the last part of your question first, the strong economy: there have been some issues with that strong economy, and not everything is participating, so we will have to see. The other thing is that if inflation persists, it will knock down the consumer, it will knock down jobs, and it will create a slower economy. Generally speaking, when you look at the broad markets and at fixed income, especially after the third quarter, we now have 30-year Treasuries above 5.5% and 10-year bonds at 5.25%. With those kinds of rates, and with where Munis and corporate bonds are, absolute levels are very high, even though relative values are not as high. Given all those levels, and then looking at the equity market, which has continued to run, there is an old word we used to use called disintermediation. Disintermediation is when you can start to get bond yields at the annual returns you think you should get in the stock market. You will start to see people move up the capital structure and say, "I do not need equities anymore. I am going to invest in safe, liquid bonds because I can garner close to that level of return from the bond market." I think at some point we will start to see that kind of asset allocation out of stocks and into bonds, and it could start as soon as the fourth quarter.


Outlook: Disintermediation Heading into Year-End

  • Not all of the economy is participating, and persistent inflation could weaken jobs

  • 30-year Treasuries above 5.5% and the 10-year near 5.25% put absolute yields very high

  • Yields nearing equity-like returns could move money from stocks to bonds as soon as Q4





Supporting notes at the date of recording (September 30, 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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