Chart to Watch: Are rising bond yields getting you down?
It has been a tough year for traditional fixed income benchmarks, with the U.S. Aggregate Bond Index (U.S. Agg) and Global Aggregate Bond Index (Global Agg) returning -0.9% and 0.04%, respectively.* In the U.S., lackluster performance has been driven by a surge in yields (the 10-year U.S. Treasury has risen 83 basis points (bps) since the beginning of the year) on the back of reaccelerating inflation due to the Iran War, robust corporate earnings, heavy government and corporate debt issuance, large fiscal deficits, and a more hawkish Federal Reserve. The story in other developed nations has been similarly bleak, with yields rising sharply on 10-year government bonds in Germany (+48 bps), Japan (+72 bps), the U.K. (+89 bps), and France (+146 bps).
Portfolio Managers John P Kerschner, Nick Childs, and John Baumgardner discuss why AAA rated collateralized loan obligations (CLOs) have outperformed benchmark fixed income indices with lower volatility thus far in 2026.
Source: Bloomberg, as of 23 October 2026. Indices used to represent asset classes: Global Agg = Bloomberg Global Aggregate Bond Index (USD hedged), U.S. Agg = Bloomberg U.S. Aggregate Bond Index, U.S. AAA CLOs = J.P. Morgan CLO AAA Index. Past performance does not predict future results.
Carry is the most significant contributor to long-term returns on fixed income assets. Changes to bond prices are a secondary driver of returns and can either add to or detract from carry returns. Long-duration bonds move more than short-term bonds when yields fluctuate, all else equal. Our preferred approach in the present environment is to a) focus on high-coupon bonds, b) be up in credit quality, and c) keep duration low to protect against fluctuations in yields. Currently yielding around 5.3% with a AAA rating and almost no duration risk, AAA CLOs check all the boxes, in our view.
Key takeaways
- With the U.S. Agg and Global Agg heavily weighted in government bonds, investor returns in 2026 have been dragged down by poor performance within sovereign debt. But not all fixed income sectors have underperformed: U.S. AAA CLOs have returned nearly 4% year to date and have exhibited 80%-90% less volatility than the Agg indices.**
- AAA CLO credit spreads have remained tight amid robust economic growth, while their floating-rate structure means they stand to benefit when rates rise, as their coupons reset quarterly. Neither the U.S. Agg nor the Global Agg have any exposure to floating-rate debt, so investors seeking high-quality floating-rate exposure should consider an active allocation to it.
- Given the heightened level of geopolitical and monetary policy uncertainty, we think fixed income investors should seek to maximize carry, or coupon income, while keeping portfolio volatility to a minimum.
*Through 23 October 2026.
**Weekly year-to-date standard deviation as of 23 October 2026: AAA CLOs: 0.2%, U.S. Agg: 1.9%, Global Agg: 1.5%.
Collateralized Loan Obligations (CLOs) are debt securities issued in different tranches, with varying degrees of risk, and backed by an underlying portfolio consisting primarily of below investment grade corporate loans. The return of principal is not guaranteed, and prices may decline if payments are not made timely or credit strength weakens. CLOs are subject to liquidity risk, interest rate risk, credit risk, call risk and the risk of default of the underlying assets.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
Securitized products, such as mortgage- and asset-backed securities, are more sensitive to interest rate changes, have extension and prepayment risk, and are subject to more credit, valuation and liquidity risk than other fixed-income securities.
Credit quality ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest).
A credit spread is the difference in yield between a corporate or securitized bond and a government bond (such as a U.S. Treasury) of the same maturity. It compensates investors for the risk that the borrower might default.
Volatility measures risk using the dispersion of returns for a given investment.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
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Important information
Please read the following important information regarding funds related to this article.
- An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital. If this happens or the market perceives this may happen, the value of the bond will fall.
- When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise (or are expected to rise). This risk is typically greater the longer the maturity of a bond investment.
- While high yield (non-investment grade) bonds generally offer higher rates of interest than investment grade bonds, they are more speculative and more sensitive to adverse changes in market conditions.
- Asset-Backed Securities (ABS) and other forms of securitised investments may be subject to greater credit / default, liquidity, interest rate and prepayment and extension risks, compared to other investments such as government or corporate issued bonds and this may negatively impact the realised return on investment in the securities.
- Some bonds (callable bonds) allow their issuers the right to repay capital early or to extend the maturity. Issuers may exercise these rights when favourable to them and as a result the value of the Fund may be impacted.
- High exposure to a particular country or geographical region carries a higher level of risk than a more broadly diversified portfolio.
- Derivatives may be used to help achieve the investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund may incur a higher level of transaction costs as a result of investing in less actively traded or less developed markets compared to a fund that invests in more active/developed markets.
- Some or all of the ongoing charges and other costs of the Fund may be taken from capital, which may erode capital or reduce potential for capital growth.
- In addition to income, this share class may distribute realised and unrealised capital gains and original capital invested. Fees, charges and expenses are also deducted from capital. Both factors may result in capital erosion and reduced potential for capital growth. Investors should also note that distributions of this nature may be treated (and taxable) as income depending on local tax legislation.
- Losses could be incurred if a counterparty became unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.