As we mentioned in December’s Shape of the Markets, 2025 was a solid year for fixed income, posting rather attractive returns for the year. Leading much of the charge, particularly for our peers and the Bloomberg US Aggregate Bond Index (“the Agg”), were Agency Mortgage-Backed Securities (Agency MBS) and Investment Grade (IG) Corporates, which experienced notable spread tightening throughout the year. These are two sectors we are generally underweight when compared to both our peers and the Agg.
So, what does the opportunity look like going forward for Agency MBS and IG Corporates?
Agency MBS Spreads are at 11th percentile tights when measured over the last 15 years. Put differently, spreads have only been tighter than current levels 11% of the time since 12/31/2010.
Agency MBS Spreads
Investment Grade Corporate Spreads
If the opportunity in Agency MBS and IG Corporates isn’t very enticing, what is?
20-Year AAA Muni Taxable Equivalent Yield (TEY) Spreads
The 20-year spot of the AAA Municipal Benchmark Curve1 has a taxable equivalent spread at a 63rd percentile over the last 15 years. In other words, spreads are actually wider than their 15-year historical averages.
Not to mention, for someone in the top tax bracket, the taxable equivalent yield (TEY) of a benchmark, AAA-rated Municipal bond is 6.57%! This starting yield is at 92nd percentile levels – yields have only been higher 8% of the time over the last 15 years!
Tax-Exempt Municipal bonds are just one sector we find attractive today. There are other sectors, such as Taxable Municipals and Commercial MortgageBacked Securities (CMBS), that we believe present attractive opportunities today, and yet are excluded from more vanilla fixed income products.
We don’t know where yields, or spreads, will go from here. Our math-based methodology, Shape Management, focuses on an objective way to identify where the opportunity lies in fixed income today. We believe a steadfast pursuit of the most favorable risk-adjusted return potential as identified by Shape Management will lead to success over time, even when it may be the “road less traveled”!
1 BVAL (Bloomberg Valuation) AAA Curve
Financial professionals only. Not for public distribution.
Taylor acts as PTAM’s Client Portfolio Manager, serving as a liaison between investments, marketing, and sales. She is responsible for investment strategy updates and portfolio
communications for all PTAM’s products. Taylor additionally leads production of various portfolio and market commentary as well as dedicated strategy content.
Taylor received a Bachelor of Arts from the Princeton School of Public and International Affairs from Princeton University. She is also a CFA® charter holder.
GLOSSARY
Yield Curve refers to the U.S. Treasury yield curve rates.
RISKS AND OTHER IMPORTANT CONSIDERATIONS
Investing involves risk; principal loss is possible. Investments in debt securities typically decrease in value when interestrates rise. This risk is usually greater for longer-term debt securities. Investments in lower rated and non-rated securities present a greater risk of loss to principaland interest than higher-rated securities. Investments in asset-backed and mortgage-backed securities include risks that investors should be aware of such as credit risk, prepayment risk, possible illiquidity and default, as well as increased susceptibility to adverse economic developments. For a complete list of disclosures, please visit www.ptam.com.
When selecting a bond to invest in, most investors rely on what we refer to as “traditional fixed income metrics,” which are generally a combination of (1) taking a stance on whether interest rates will increase or decrease, (2) yield and (3) duration. Nearly 30 years ago, PTAM’s founders recognized the potential shortcomings in traditional bond metrics, and developed Shape Management, a math-based investment process that addresses each ofthese shortcomings by analyzing the risk return profile of a bond’s future cash flows. Shape Management is a mathematical calculation that analyzesthe risk return profile of a bond’sor group of bonds’ future cash flows. By using Shape Management, PTAM creates projections of the performance of specific bonds or grouping of bonds. These projections are not the actual performance of any bond or product. As a result, Shape Management performance in this email were not actually achieved by any PTAM investment or product. The criteria and assumptions underlying the projected performance may prove to beincorrect. Prospective investors should not rely solely on such projected performance and should conduct a thorough independent analysis of the investment opportunity. The graphs included throughout this email are provided for illustrative and educational purposes only. Projected performance results mayhave many inherent limitations. No representation is being made that an investment will, or is likely to, achieve profits or losses similar tothose shown. In fact, there are frequently significant differences between projected performance results and actual results subsequently achieved. Although projected performance may be useful to consider when making an investment decision. Investment decisions based on Shape Management information may not be profitable. All projected performance is shown as net performance, which includes management fees, reinvestment of interest payments, principal payments, and capital gains.
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