Piton Webinar: Year-End 2025 Fixed Income Update and 2026 Outlook
- Jan 21
- 8 min read
Welcome to Piton Investment Management's year-end 2025 fixed income update and 2026 outlook with CIO Brian Lockwood. After a nine-month pause, the Federal Reserve delivered three quarter-point rate cuts in the final four months of 2025, bringing the federal fund rate to 3.5 to 3.75 % by December. The year's final Fed decision featured unprecedented division with a nine-to-three vote, the most dissent since 2019, while the 43-day government shutdown disrupted critical economic data collection. Despite these challenges, fixed income delivered its strongest annual performance since 2020. With a core bond market returning approximately 7%. Today, Brian examines how 2025 reshaped the fixed income landscape and what investors should expect as we move into 2025.
Recorded January 6, 2026
Q1: Brian, how did fixed income markets perform in 2025? And what were the biggest surprises or turning points for 2026?
Happy New Year to everybody. The short answer to your question is definitively yes. Fixed income markets had a great 2025, the best since 2020. And guess what? In terms of this decade, fixed income has not been doing well. So to see both the aggregate and intermediate markets in high-grade fixed income return in the area of 7%, that's a really good figure. Now, granted, I know we have had three really strong years of equity returns. So again, fixed incomes in the backseat versus sectors like equities and even gold in the past year. But still, this return shows asset allocators why there are still a reason for bonds in your pie charts, in your asset allocations. A good way to look at fixed income returns is fixed income versus cash. Because if you think of cash, cash is a one-day fixed income or very, very short fixed income. And cash returns somewhere in the range of 4.00% - 4.25% in a total return since in 2025. So to get 300 basis points over that just by moving out in terms of duration, in terms of credit quality, that is a pretty good return and we expect that to continue into 2026.
Fixed Income Performance in 2025
Fixed income delivered best annual performance since 2020, with core bond market returning approximately 7%
Outperformed cash by 300 basis points (cash returned 4-4.25% vs. 7% for intermediate bonds)
Strong returns reinforce bonds' role in asset allocation despite equity markets' three-year run
Q2: The Fed cut rates three times in Q4 2025, but the December decision featured the most divided votes since 2019. How did this easing cycle impact different fixed income sectors?
Sectors all did pretty well in terms of high-grade sectors. Some did obviously better than others. Mortgages were a good standout. Some of the high-beta sectors did pretty well. But interestingly enough, the big story in sectors due to the Fed cuts is the yield curve and the steepening that we saw. We saw the two-year drop about 77 basis points over 2025. The 10-year dropped about 40 basis points - 44 basis points. And interestingly enough, the long end, the 30-year bond, was actually up six basis points. We had a continued steepening of the yield curve. If you were stuck in the long end with most, you underperformed what broader markets have done. That was probably the real interesting story of the year based on the Fed cuts.
Fed Rate Cuts and Sector Impact
Fed delivered three quarter-point cuts in Q4 2025, bringing federal funds rate to 3.5-3.75%
Yield curve steepening was the key story: 2-year dropped 77 bps, 10-year fell 44 bps, 30-year rose 6 bps
Long-end positioning underperformed broader markets; mortgages and high-beta sectors performed well
Q3: The 43-day government shutdown disrupted economic data collection with October CPI missing entirely. How did this affect market sentiment and Fed decision making in Q4?
Interestingly, the shutdown probably took away a little interest rate volatility during the period because people did not really know how to read the data. As of the date of recording this, we had our first non-farm payroll number that was the December report, which was very clean. And guess what? It's lower. And that's a big thing that the Fed has focused on and kind of making that switch from inflation being the most important thing to now the labor market being probably a little bit more important in their decision-making property.
Government Shutdown Impact
43-day shutdown disrupted economic data collection, with October CPI missing entirely
Reduced interest rate volatility as markets struggled to interpret incomplete data
First clean jobs report (December) showed softer labor market, supporting Fed's pivot toward employment focus
Q4: Inflation eased to 2.7 % in December, while the labor market softened throughout the year. How are you interpreting these dynamics and what do you, what do they signal for Fed policy in 2026?
In terms of what we have seen is twofold. We are going to get a new Fed chairman in 2026. Also, it looks like the Fed has moved their focus towards the labor market. And by the way, things like what we have seen with Venezuela longer term out, that might be better for inflation. We have seen some inflation numbers that are coming down to very close to the Fed's comfort zone. The fact that we are seeing non-farm payroll numbers come in well below 100,000 and negative for the last three-month periods - it gives the Fed a little bit of leeway to continue this easing process. Maybe not a deep easing process because, as you mentioned before, we have some discrepancies about what people want the Fed to do and how close they are to a neutral rate as of now. But given the fact that if we do see the labor markets continue to slow, it gives them room to cut maybe two more times this year.
Inflation and Labor Market Dynamics
Inflation eased to 2.7% in December, approaching Fed's comfort zone
Non-farm payrolls fell below 100,000 with negative three-month trends, signaling labor market softening
Fed shifting focus from inflation to labor market, potentially allowing for two additional cuts in 2026
Q5: Municipal bonds recovered from a negative first half to finish near 4 % while emerging markets debt returned nearly 20%. Where do you see the best relative value opportunities heading into 2026?
Emerging markets have the story even in hard currency; they returned around 12%. You saw what they got from the currency play. It certainly was probably the best sector in fixed income. Municipal bonds had a rough start and then kind of came back. The long end kind of came back and matched the performance of what intermediate municipal bonds are doing. I think Municipal bonds, the story with where we are looking at those, there are a couple issues going on with certain cities and certain municipalities that we want to be really high grade in that sector. And that means essential service revenue bonds. It means general obligation, state general obligation bonds, really high credit quality in that sector, just because there are some moving parts politically and with certain geographies.
Municipal Bonds and Emerging Markets Opportunities
Emerging markets debt led fixed income with nearly 20% total return (12% in hard currency alone)
Municipal bonds recovered from negative first half to finish near 4% as long-end rallied
Recommend high-grade munis only: essential service revenue bonds and state general obligation bonds due to political/geographic concerns
Q6: With corporate spreads historically tight and the Fed's dot plot signaling only one cut in 2026, how should investors be positioning their portfolio as we enter the new year?
Probably one of the biggest surprises for us last year is how well the corporate bond market performed and how stable the corporate bond market was throughout 2025. Even coming into 2026, we saw $70 billion in the first few days of supply to the corporate bond market and the bond market didn't flinch. It really just digested that. So, I think that is probably the biggest surprise, but the tightness of spreads has pushed us to being a little more underweight or a little more high quality and defensive names within that sector, partly because the risk return just does not favor the sector. And one of the things with corporate bonds and corporate spreads is that it is pretty synonymous with the stock market. You could say it has lasted long, but at some point, the risk-return will come out, and we will get a better chance to buy wider spreads and switch out of government bonds back into corporate bonds.
Portfolio Positioning with Tight Spreads
Corporate spreads historically tight; market absorbed $70 billion in early 2026 supply without flinching
Moving underweight/defensive in corporates as risk-return doesn't favor the sector
Corporate spreads track equity markets—waiting for better entry point when spreads widen
Q7: With new Fed leadership on the horizon, large budget deficits and the persistent inflation pressures, what is your outlook for fixed income in 2026 and what advice would you offer investors?
I think one of the most important things is to know what you own in fixed income. If you own a vehicle, if you own an ETF, if you own a fund or an SMA, know what the guidelines are. Know where you have to be. We talked earlier about the steepening yield curve. We think that could continue and the yield curve could be much deeper. And that means to your point, the deficits, the long end would suffer. So we like that five to 10 year space right now. The two-year, the front end of the curve, really did a lot of the hard work in 2025 coming down 70 plus basis points. But we now think the sweet spot is more like the five to 10 year area in terms of where you can get great total returns, both in treasury markets and corporate markets as well as munis.
What does that mean for us? It means we'll be pushing our durations out a little bit more to that five to 10 year space rather than having a broad sector of zero to 10 year bonds. But what it tells people in general is maybe you do not need an aggregate bond portfolio. Maybe for what you are using fixed income the intermediate sector, which returned around 7 % last year, 25 basis points - 30 basis points less than the aggregate market. Maybe you do not need the risk of the aggregate market and the long end where you can stay in an intermediate space and still get fixed income to do what you want it. That is what we are telling clients. Clients that have been in cash for a long time, really smart move to move out into intermediate. And maybe the clients that are in aggregate bonds, maybe it is a smart move for next year to come back to the intermediate space and take out the risk of the long end.
2026 Fixed Income Outlook
Favor 5-10 year duration sweet spot as front-end (2-year) already did heavy lifting in 2025
Expect continued yield curve steepening; long-end vulnerable due to budget deficits
Recommend intermediate bonds over aggregate for most investors—similar returns (7% vs. 7.25%) with less long-end risk
Q8: Piton has recently launched a structured notes product. Can you give us an update?
Our Piton Structured High Income strategy is a new structured note SMA spearheaded by Kris Konrad, one of Piton's founders who focuses on enhanced yield solutions for our clients. This exposure really dovetails nicely to conservative fixed income because when you think about it in the broader picture, it is another form of defensive investing. For clients that may be asking; ‘How can you get a little more defensive on a market that's gone up for the last three years and capitalize on the inevitable increase in volatility?’ a good way to do that is to use structured products, and these types of investments can provide attractive yield (double digit) by structuring around some of those names that he knows and likes, but in turning them into more of a yield focus, which he's done in the Piton Structured High Income strategy. When you look at the coupons of recent note issuance in the SMA, notes with low to mid double-digit yields and significant downside price protection are being realized. So, it is a vehicle that uses recent equity price volatility to generate high-yielding investment income.
Structured Notes Product Launch
New SMA strategy led by Kris Konrad focusing on structured equity income
Delivers high coupons through structured notes on select individual equity names
Seeks to harness equity volatility and create double digit levels of income with downside protection
Supporting notes at the date of recording.
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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.