Nominal and real yields have risen, creating some of the most attractive opportunities investors have seen in fixed income in several years. A resilient economy, higher oil prices, sticky inflation and growing worry about the deficit have all contributed to higher yields across much of the bond market.
Today’s bond market offers compelling value to investors without requiring significant additional risk. With real yields near 3%, investment grade corporate yields are higher than they have been in many years and the risk reward relative to the S&P earnings yield is favorable. While yields are attractive, investment grade credit spreads are near historic tights reinforcing the important focus on risk management and liquidity.
Municipal bonds also provide an attractive opportunity as valuations relative to taxable bonds have improved recently and look exceptionally attractive. Tax equivalent yields of 7.6% to 8.6% compete well as do intermediate maturities, particularly those in the 10-15-year segment of the market.
Panel Discussion
For deeper context in a year where bond investors saw record issuance and historically tight spreads, Warren Pierson moderated a panel of Baird Senior Portfolio Managers examining the underlying market dynamics and investment strategies across the corporate credit, securitized and municipal sectors. The panel included Andy O’Connell, CFA, a portfolio manager and senior investment analyst, Meg Dean, CFA, a portfolio manager and co-leader of the securitized sector and Gabe Diederich, CFA, a portfolio manager for the municipal sector. Following is an edited transcript of the discussion:
Pierson: Andy, let's start with the corporate market.
O'Connell: Issuance is on pace for an all-time record, approaching $2 trillion for the year, with several months posting the largest or second-largest monthly totals ever. It's broader than just hyperscalers. Financials issuance is up too, and we like playing there; but hyperscaler deals have been unique in size: eight jumbo $25 billion+ deals this year alone, versus just 11 in all prior history combined, and each funded easily.
Pierson: What has that done to spreads?
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O'Connell: Hyperscaler spreads have moved wider, but spreads for the general market have stayed tight. Demand has matched supply. Fixed income inflows are near $600 billion year-to-date and on pace for a record. Without that demand, spreads likely would have widened.
Pierson: And the fundamentals?
O'Connell: Leverage is rising at the margin, but from higher-quality issuers, so fundamentals still support tighter spreads — that's the key, since technicals can only carry you so far. This past quarter saw double-digit revenue and EBITDA growth, though we're watching for margin pressure. Triple-B names in particular have shown discipline, keeping leverage roughly flat despite inflation, tariffs, geopolitics, and oil prices.
Pierson: We haven't participated in much of the issuance, walk us through that.
O'Connell: Hyperscaler and data center issuance has topped $300 billion, up from just $30 billion two years ago, and these names have gone from about 2% to over 4% of the investment-grade index. Oracle and Amazon are now top-10 issuers; Google went from outside the top 200 to the top 30. We've been patient, working closely with the securitized team, and are underweight the hyperscalers. Spreads have widened enough recently to get more interesting, and we're starting to look at adding exposure, especially if CapEx or issuance growth starts to slow.
Pierson: Large corporate deals with features that overlap with securitized bonds are a newer sector.
Dean: Terms aren't standardized, and most corporate teams lack securitized structuring expertise. That's our edge. We've been able to take advantage of deals pricing wider with attractive structural features and pass on ones that weren't well-structured. Dealers were surprised when we walked away, but our pushback on terms has led to better structures over time. Collaboration across teams has been key.
Pierson: There's been real rate volatility this year. The 30-year mortgage rate moved from under 6% to 6.75% in six months. Government efforts to buy mortgages haven't kept pace, and the 10-year recently touched 5%. Yet investors haven't fled the bond market.
Dean: It's as much about what you don't own. We've been underweight agency MBS, and that positioning paid off as volatility rose around the Iran conflict, credit has outperformed. We've also seen strong returns in non-agency RMBS on the back of solid underwriting and use securitized triple-A paper for liquidity with attractive carry. That said, stress is emerging; subprime auto is flashing warning signs. The bottom 20% of consumers have savings below COVID levels and heavy reliance on revolving debt, unlike the top 20%, who've locked in low mortgages, hold public equities, and have 25% higher cash savings than pre-COVID. Employment is the metric to watch.
Diederich: Housing funds through both taxable and tax-exempt markets, and munis are seeing similar issuance trends for a third straight record year, around $600 billion expected. Housing issuance has shifted from single-family (state housing authorities) to multifamily, driven by affordability pushes and looser construction rules; these deals often lock in approximately 15-year income with agency backing at triple-B-like spreads, which we like. We've also had to adapt to AI-driven issuance in munis including "prepaid gas" deals which are tax-exempt securities that help lower utility bills, enabled by a corporate obligor. What started with banks and insurers has expanded to names like National Grid, Realty Income, and even Alphabet/Google. Working closely with Andy's team on credit quality here has made this a great area for cross-sector collaboration.
Pierson: Let's bring it together. How are we positioning portfolios?
O’Connell: Spreads have been historically tight all year, trading in just a 20 basis-point range which provided very few real opportunities. Our message has been discipline and dry powder. But given strong fundamentals, we're running a modest overweight to credit. We're keeping spread duration short, since we don't feel compensated further out — favoring short financials, industrials, and select hyperscalers while staying overweight energy (midstream) given the fundamental backdrop. We've bought about $600 million in credit weekly on average.
Dean: Our best returns have come from underweighting agency MBS and overweighting non-agency RMBS, ABS, and CMBS, particularly short CMBS in our ultra-short portfolio, where we've added 5% exposure while competitors sell. In non-agency, getting involved early with loan aggregators, before deals price six to 10 weeks out, has been a real differentiator.
Diederich: On the muni side, we've also moved up in quality, with local general obligation bonds as one of our biggest overweights. We still like hospitals but are being selective given upcoming Medicaid changes, and in higher education we're watching demographic headwinds. It’s not a cliff, but a real decline. We’re staying diversified and liquid to capitalize on the wave of new issuance. Value this year has come almost entirely from security selection, not big sector bets. The muni curve is about three times as steep as Treasuries right now, so there's real reward for extending duration.
Pierson: The bottom line: there's good value in bonds today, especially on a tax-adjusted basis. Investors don't need to take much risk to get attractive yields and that's what's driving the flows.
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