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.