Quarterly Bond Market Outlook

Q2 bond market outlook for ETF investors Position for income, resilience, and flexibility in a more uncertain environment

Near-term inflation risks have re-emerged, complicating the policy outlook even as longer-term expectations remain anchored
Markets reflect stagflationary dynamics, limiting diversification across traditional asset classes
With tight spreads, elevated yields, and higher-for-longer rates, income is likely to drive returns—and buffer volatility

April 15, 2026 7 min read

Robert Selouan, CAIA, CFA

Senior Research Strategist

Federico Burroni, CFA

Research Analyst

Fixed income markets enter the second quarter facing a more complex environment. Near-term inflation risks have re-emerged, policy expectations have shifted, and stagflationary pressures have eroded the traditional diversification benefits across asset classes.

At the same time, elevated yields and historically tight spreads have shifted the return equation decisively toward income.

With geopolitical conflict reinforcing near-term inflation pressures and growth increasingly uncertain, income and carry are likely to be the primary drivers of returns—while also providing an important buffer against heightened volatility.

In this environment, investors should consider focusing on:

Shorter-duration and income strategies, including high yield with structural allocations to floating-rate exposures like bank loans and CLOs, to help capture elevated income while reducing sensitivity to interest rate volatility
High quality and securitized exposures, emphasizing asset-backed and mortgage related sectors, to enhance resilience, diversify income sources, and improve risk-adjusted outcomes

Inflation risk repriced unevenly

Short-dated breakeven inflation rates have moved higher—reflecting sensitivity to near-term energy and geopolitical shocks—while longer-term inflation expectations remain anchored (Figure 1).

Figure 1: Inflation expectations have diverged

This divergence indicates that markets are increasingly focused on near-term inflation pressures but remain confident in longer-term policy credibility, likely creating greater policy and rate volatility and less linear fixed income returns.

Market expectations for Federal Reserve (Fed) policy have also shifted materially in recent weeks. Markets have moved from pricing in multiple rate cuts for 2026 to little easing, and even some probability of further tightening (Figure 2). This repricing supports a higher-for-longer rate backdrop, while continued tension between inflation and growth risks adds uncertainty to the policy path.

Additionally, recent cross-asset performance reflects stagflation-like dynamics, with growth concerns weighing on credit and growth-sensitive assets while inflation pressures have kept rates high and resulted in losses in duration-sensitive exposures.¹

Curve dynamics remain uncertain, but roll-down still matters

After steepening through much of 2025, the US Treasury curve recently shifted toward a bear flattening (Figure 3), underscoring its sensitivity to inflation and policy expectations.

While the curve has normalized from the deep inversions of 2022-2023, it remains only modestly upward-sloping by historical standards.

In this environment, maintaining exposure to short to intermediate maturities may allow investors to capture carry and manage reinvestment risk, while limiting exposure to longer-duration volatility.

Income: Now the primary driver of returns

With yields still elevated, credit offers a compelling income backdrop. The 2-year Treasury yield remains 190 basis points above its 20-year average.² Meanwhile, credit spreads are near historically tight levels, with high yield and investment-grade bond spreads roughly 38% and 43% below their long-term average,³ respectively.

This combination means that returns are likely to be driven more by income and carry than by further spread compression.

The composition of fixed income exposures also matters in this context. Securitized assets, including ABS and certain mortgage-related sectors, can behave differently from traditional corporate credit because their performance is driven more by cash flows and underlying collateral than by broad corporate earnings trends.

And with growth concerns weighing on credit-sensitive sectors, these exposures may provide more resilient income and differentiated return drivers. In fact, incorporating securitized exposures has historically improved risk-adjusted outcomes relative to traditional core bond allocations (Figure 4).

Credit dispersion favors selective, active credit exposure

Recent developments in credit markets have drawn increased attention to potential risks, particularly within private credit. However, recent performance suggests that current stress is more concentrated than broad-based.

Year to date, business development companies (BDCs), a proxy for lower-tier direct lending, have underperformed meaningfully, while broader public credit markets, including high yield and leveraged loans, have remained relatively stable (Figure 5).

This suggests pressures are largely confined to lower-quality segments, particularly middle market, sub-investment-grade direct lending, rather than reflecting a broad deterioration in credit fundamentals.

But higher-quality, idiosyncratic exposures, such as investment-grade private credit, can provide more resilient and less market-dependent income streams. In particular, asset-backed private credit, supported by the cash flows of underlying collateral rather than only corporate performance, may offer additional structural resilience and diversification benefits.

Positioning portfolios for income, resilience, and flexibility

As markets adjust to shifting inflation dynamics, evolving policy expectations, and increased geopolitical uncertainty, fixed income returns are likely to remain uneven. Periods of stability may be punctuated by episodic repricing as new information is absorbed.

That means flexibility and selectivity are likely to matter more than broad beta exposure.

Shorter-duration strategies can help investors pursue elevated income while limiting rate sensitivity. Core bond allocations with securitized exposure may provide more resilient income and differentiated return drivers in an environment with uncertain growth. And active high yield strategies, particularly those incorporating floating-rate instruments, may be better positioned to navigate a higher-for-longer, higher-volatility backdrop.

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Glossary

Footnotes

Disclosures

Important risk discussion

The views expressed in this material are the views of Robert Selouan and Federico Burroni through the period March 31, 2026, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projections.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

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The performance data quoted represents past performance. Past performance does not guarantee future results.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA's express written consent.

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Diversification does not ensure a profit or guarantee against loss.

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Privately issued securities are securities that have not been registered under the Securities Act and as a result are subject to legal restrictions on resale. Privately-issued securities are not traded on established markets and may be illiquid, difficult to value and subject to wide fluctuations in value. Limitations on the resale of these securities may have an adverse effect on their marketability, and may prevent the Fund from disposing of them promptly at reasonable prices.

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Valuation Risk: Some portfolio holdings, potentially a large portion of the Fund’s investment portfolio, may be valued on the basis of factors other than market quotations. This may occur more often in times of market turmoil or reduced liquidity. There are multiple methods that can be used to value a portfolio holding when market quotations are not readily available. The value established for any portfolio holding at a point in time might differ from what would be produced using a different methodology or if it had been priced using market quotations. Portfolio holdings that are valued using techniques other than market quotations, including “fair valued” securities, may be subject to greater fluctuation in their valuations from one day to the next than if market quotations were used. In addition, there is no assurance that the Fund could sell or close out a portfolio position for the value established for it at any time, and it is possible that the Fund would incur a loss because a portfolio position is sold or closed out at a discount to the valuation established by the Fund at that time.

Private credit can range in credit quality depending on a variety of factors, including total leverage, amount of leverage senior to the security in question, variability in the issuer’s cash flows, the size of the issuer, the quality of assets securing debt and the degree to which such assets cover the subject company’s debt obligations. In addition, there can be no assurance that the Adviser will be able to secure all of the investment opportunities that it identifies for the Fund, or that the size of an investment opportunity available to the Fund will be as large as the Adviser would desire, on account of general economic conditions, specific market developments, or other circumstances outside of the Adviser’s control.

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Bonds generally present less short-term risk and volatility than stocks but contain interest rate risk (as interest rates rise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

Investing in high yield fixed income securities, otherwise known as "junk bonds", is considered speculative and involves greater risk of loss of principal and interest than investing in investment-grade fixed income securities. These Lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.

Investments in asset backed and mortgage-backed securities are subject to prepayment risk which can limit the potential for gain during a declining interest rate environment and increases the potential for loss in a rising interest rate environment.

Government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns.

Increase in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable.

The values of debt securities may decrease as a result of many factors, including, by way of example, general market fluctuations; increases in interest rates; actual or perceived inability or unwillingness of issuers, guarantors or liquidity providers to make scheduled principal or interest payments; illiquidity in debt securities markets; and prepayments of principal, which often must be reinvested in obligations paying interest at lower rates.

Foreign (non-U.S.) Securities may be subject to greater political, economic, environmental, credit and information risks. Foreign securities may be subject to higher volatility than U.S. securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets.

Derivatives are based on one or more underlying securities, financial benchmarks, indices, or other obligations or measures of value; additional risks with derivatives trading (e.g., market, credit, counterparty and illiquidity) are possibly greater than the risks associated with investing directly in the underlying instruments. Derivatives can have a leveraging effect and increase fund volatility that can have a large impact on Fund performance.

Floating rate securities are often lower-quality debt securities and may involve greater risk of price changes and greater risk of default on interest and principal payments. The market for floating rate bank loans is largely unregulated and these assets usually do not trade on an organized exchange. As a result, floating rate bank loans can be relatively illiquid and hard to value.

Bank Loans are subject to credit, interest rate, income and prepayment risks. The fund may invest in secured and unsecured participations in bank loans. Participation loans are loans made by multiple lenders to a single borrower, e.g., several banks participate in one large loan with one of the banks taking the role of the lead bank. The lead bank recruits other banks to participate and share in the risks and profits. There is also the risk that the collateral may be difficult to liquidate or that a majority of the collateral may be illiquid. In participation the fund assumes the credit risk of the lender selling the participation in addition to the credit risk of the borrower.

Investments in senior loans are subject to credit risk and general investment risk. Credit risk refers to the possibility that the borrower of a senior loan will be unable and/or unwilling to make timely interest payments and/or repay the principal on its obligation. Default in the payment of interest or principal on a senior loan will result in a reduction in the value of the senior loan and consequently a reduction in the value of the Portfolio’s investments and a potential decrease in the net asset value (“NAV”) of the Portfolio.

The value of the debt securities may increase or decrease as a result of the following: market fluctuations, increases in interest rates, inability of issuers to repay principal and interest or illiquidity in the debt securities markets; the risk of low rates of return due to reinvestment of securities during periods of falling interest rates or repayment by issuers with higher coupon or interest rates; and/or the risk of low income due to falling interest rates. To the extent that interest rates rise, certain underlying obligations may be paid off substantially slower than originally anticipated and the value of those securities may fall sharply. This may result in a reduction in income from debt securities income.

Because of their narrow focus, financial sector funds tend to be more volatile. Preferred Securities are subordinated to bonds and other debt instruments, and will be subject to greater credit risk. The municipal market can be affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities. The fund may contain interest rate risk (as interest rates rise bond prices usually fall); the risk of issuer default; inflation risk; and issuer call risk. The Fund may invest in U.S. dollar-denominated securities of foreign issuers traded in the United States.

Non-diversified funds that focus on a relatively small number of securities tend to be more volatile than diversified funds and the market as a whole.

Issuers of convertible securities may not be as financially strong as those issuing securities with higher credit ratings and may be more vulnerable to changes in the economy. Other risks associated with convertible bond investments include: Call risk which is the risk that bond issuers may repay securities with higher coupon or interest rates before the security’s maturity date; liquidity risk which is the risk that certain types of investments may not be possible to sell the investment at any particular time or at an acceptable price; and investments in derivatives, which can be more sensitive to sudden fluctuations in interest rates or market prices, potential illiquidity of the markets, as well as potential loss of principal.

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AdTrax Code: 5644744.13.1.AM.RTL
Expiry Date: 7/31/2026

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