Rising Treasury yields have pressured fixed income markets in 2026, reviving memories of 2022—one of the most difficult years on record for bond investors. But while rates are moving higher again, today’s starting point looks meaningfully different.¹

During the Federal Reserve’s aggressive 2022 tightening cycle, the federal funds target range rose from 0.25% in March 2022 to 5.25% by July 2023. Over those 18 months, the Bloomberg US Aggregate Bond Index declined 8.27% cumulatively and posted a record 13.01% decline in 2022. Entering that period, the index’s yield to worst was just 1.75%, leaving relatively little income to offset falling bond prices.²

Today, investors have considerably more yield to help absorb price pressure. One year ago, the Bloomberg US Aggregate Bond Index’s yield to worst stood at 4.37%, providing a higher level of starting income as rates have moved higher. Rates also have risen at a substantially slower pace than during the 2022 tightening cycle.²

Higher starting yields do not eliminate interest-rate risk, particularly for portfolios with duration. But the combination of a larger income cushion and a more gradual rise in rates has made the total-return environment meaningfully different from 2022.

With the future path of rates uncertain, we believe focusing on bottom-up security selection, downside protection and attractive risk-adjusted return opportunities remains a more durable approach than attempting to predict each move in interest rates.

On the surface, little about credit markets today looks dramatic. Within a persistently resilient economy, broad indexes are orderly, volatility is contained, capital markets are functioning smoothly, and liquidity prevails as the financial system continues to absorb large flows and position unwinds in various parts of the market.¹

But dig down a level and the picture looks very different. Dispersion across companies, sectors and ratings has widened materially. As shown in the chart, the Cboe S&P 500 Dispersion Index (DSPX), a forward-looking measure of expected dispersion among S&P 500 constituents, is elevated relative to its history even as the Cboe Volatility Index (VIX) remains comparatively subdued. Expressed differently, the volatility of individual companies increasingly looks much higher than the volatility implied by the index itself.

Low index volatility does not mean little is happening. It can mean a lot is happening beneath the surface. The unusually wide gap between constituent dispersion and aggregate volatility is important because it increases the scope for security selection to be impactful, even when the overall market appears remarkably calm. This improved risk-reward dynamic may warrant selectively adding exposure, increasing portfolio yield and deploying capital where spreads, fundamentals and volatility offer more compelling opportunities.

To us, the opportunity set for allocators today appears to be in extending toward structural credit where potential returns can be enhanced by origination, collateral, documentation, control and complexity rather than by corporate beta alone, as is often the case in more traditional private credit exposures.

In markets such as today’s, where abundant liquidity can mask underlying dispersion, active investment selection and risk mitigation may become increasingly critical drivers of long-term outcomes.