The fixed income market delivered a robust performance in 2025, marked by a return to positive real yields and a “normalization” of monetary policy. While the year began with volatility regarding the timing of Federal Reserve pivots, it concluded with a solid rally, driven primarily by coupon income (“carry”) rather than significant capital appreciation from falling long-term yields.

The Bloomberg US Aggregate Bond Index (the “Agg”) returned 7.30% for the full year 2025.2 The fourth quarter contributed modestly to this total, adding 1.10% as the Fed delivered widely anticipated rate cuts.

2025 Market Overview: The Return of Income

After the historic drawdowns of 2022 and the recovery of 2023-2024, 2025 was characterized by stability and income. The primary driver of returns was yield itself. With starting yields at their highest levels in over a decade, bonds provided a significant cushion against price volatility.

Summary of 4Q 2025

The fourth quarter was a microcosm of the year. The Fed cut rates by 0.50%, validating the market’s expectations, but the 10-year Treasury yield refused to drop significantly below 4%.

• Sector Winner: Municipals had a strong finish in Q4, up over 4% as supply constraints met high demand.
• Sector Lag: Long-Term Treasuries lagged due to the curve steepening, as inflation fears lingered due to uncertainty surrounding Fed policy.

Interest Rates: The Steepening Curve

The narrative of 2025 was dominated by the divergence between the Federal Reserve’s policy rate (short end) and market-driven Treasury yields (long end).

• Federal Reserve Policy: The Fed cut the federal funds rate by a total of 0.75% (75 basis points) in 2025, with a notable 50 basis point cut occurring in the fourth quarter. This policy shift was a response to cooling inflation and a softening labor market, aimed at engineering a soft landing.

• The Yield Curve: While short-term rates fell in lockstep with the Fed, long-term rates were sticky. The 10-year US Treasury yield remained range bound for most of the year between 4% and 4.25%.
• The Bear Steepener: This dynamic resulted in a steepening of the yield curve. Investors holding short-duration assets benefited from price appreciation as front-end yields fell, while long-duration Treasuries saw muted price gains because long-term inflation expectations and fiscal deficit concerns kept the 10-year yield elevated on a relative basis.

Credit Spreads: Historically Tight

Credit risk was rewarded in 2025. Despite fears of a recession early in the year, the US economy displayed remarkable resilience, keeping corporate default rates low and balance sheets healthy.

• Investment Grade (IG): Corporate spreads remained historically tight throughout the year, ending Q4 near multi-year lows (trading inside of 75 basis points for the broad IG market). Strong demand from institutional investors locking in yields kept spreads compressed.
• Performance vs. Treasuries: Because spreads did not widen, corporate bonds outperformed Treasuries. The “excess return” (return above risk-free Treasuries) was positive, as the extra yield from corporate bonds (the spread) was captured without being eroded by credit deterioration.
• High Yield: Lower-rated credits also performed well, benefiting from the “risk-on” sentiment that pervaded the equity markets in late 2025. The floating-rate nature of many leveraged loans, however, became a slight headwind in Q4 as the Fed cut rates, making fixed-rate high-yield bonds relatively more attractive.

Core Fixed Income

	YTW	Duration	4Q25	YTD
WCM Core Fixed Income	5.061	5.85	0.49	5.99
Bloomberg U.S. Aggregate	4.343	5.95	1.10	7.30

The Core Fixed Income strategy returned 0.49% during the 4^th quarter versus 1.10% for the index. Underperformance for both the quarter and full year was primarily driven by our underweight to the mortgage backed securities sector. As credit spreads tightened through the year, the portfolio’s overweight to corporates was the largest contributor to performance. Our tilt to lower rated investment grade bonds further pushed income into the portfolio, with BBB rated corporates returning 8.20% for the year.

Key rate duration proved more important than outright duration in 2025. Using a barbell approach opposed to matching index duration across maturity buckets underperformed during the year underperformed significantly through the year. The 10+ year duration cell returned 6.64%, while the belly of curve (5-10yr) returned over 8%.

We expect the contributing factors of return in 2026 to resemble 2025. We continue to see opportunities in Agency MBS, due to excess spread and supply/demand technicals driven by a push from the Trump administration to lower mortgage rates and the growing potential for the Fed to begin buying MBS again.

Intermediate Fixed Income

	YTW	Duration	4Q25	YTD
WCM Intermediate Fixed Income	4.097	2.37	1.25	6.45
Bloomberg U.S. Gov/Credit 1-5 yr	3.712	2.54	1.18	6.11

The Intermediate Fixed Income strategy outperformed for the 4^th quarter and year. The largest contributor to performance was the portfolio’s overweight to corporate bonds versus the benchmark. We remained relatively short duration relative to the index, which was a marginal drag on performance for both the quarter and full year.

Ultra-Short Fixed Income

	YTW	Duration	4Q25	YTD
WCM Ultra-Short	4.187	1.37	1.17	5.78
Bloomberg Short-term Gov/Corp	3.744	0.45	1.05	4.46

Spread tightening and declining short term interest rates led to outperformance of the Ultra-Short Fixed Income strategy through the 4^th quarter and 2025. Financials were the largest contributor to performance driven by spread tightening in banks as the shift towards deregulation took hold.

We continue to believe that fixed rate bonds will outperform floating rate bonds in the short duration space. Term Secured Overnight Financing Rate (SOFR) has declined over 150bps from its high in mid 2024 to 3.67%. This has led to lower coupon resets for floaters and we believe this decline will continue through the first half of 2026.

Short Duration High Yield

	YTW	Duration	4Q25	YTD
WCM Short Duration High Yield	5.759	2.26	1.46	7.13
Bloomberg U.S. HY 1-5 yr Cash Pay	6.348	1.84	1.18	7.81

Coupons were king across the high yield space. While spreads tightened marginally through the year, the majority of returns were derived from income. The index return of 7.81% was comprised of 0.61% price return and 7.21% income return. Underperformance for the strategy was primarily attributable to security selection and the overweight to BBB rated issuers. Two and three year BBB rated credit spreads were relatively unchanged in 2025, while BB spreads tightened 20-30bps respectively.

Given the relatively tight spread environment across high yield credit, we would continue to have a higher quality bias through 2026. While we do not foresee severe credit deterioration this year, we are still in the late stages of this cycle and believe more defensive high yield portfolios will outperform on a risk adjusted basis over the next few years.

Conclusion

For fixed income investors, 2025 was the year the asset class did its job: providing diversification, safety, and—most importantly—income. With the Bloomberg Agg up 7.30%, the “40” in the 60/40 portfolio demonstrated renewed relevance. Heading into 2026, the focus remains on yield capture, as the tight level of credit spreads suggests the market is priced for perfection, leaving little room for error if the economy falters.

Disclaimer

This report is published solely for informational purposes and is not to be construed as specific tax, legal or investment advice. Views should not be considered a recommendation to buy or sell nor should they be relied upon as investment advice. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. Information contained in this report is current as of the date of publication and has been obtained from third party sources believed to be reliable. WCM does not warrant or make any representation regarding the use or results of the information contained herein in terms of its correctness, accuracy, timeliness, reliability, or otherwise, and does not accept any responsibility for any loss or damage that results from its use. You should assume that Winthrop Capital Management has a financial interest in one or more of the positions discussed. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Winthrop Capital Management has no obligation to provide recipients hereof with updates or changes to such data.

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