Core Bond (Plus): What’s Under the Hood and When to Consider It

Core and core-plus bond portfolios now offer a favorable risk-reward trade-off versus short-duration strategies as yields and valuations have become more attractive.

• Franklin Templeton expects the 10-year Treasury yield to remain broadly range-bound and favors investing near or above the upper end of the range, around 4.75%; historically, higher starting yields have predicted higher forward returns.
• Short-duration Treasuries remain resilient for cautious investors: two-year yields would need to rise above 9% for the asset class to deliver a negative one-year return.
• Investment-grade issuance exceeded US$1.3 trillion in the first seven months of 2026, partly because of hyperscaler borrowing; based on 2015-2025 seasonality, average monthly issuance was about 30% lower in the second half of the year.
• High-yield bonds appear attractive above a 7% all-in yield; low duration and an improved credit profile support resilience, although higher-rated issuers are preferred and CCC bonds have underperformed.
• Agency MBS fundamentals remain solid because most borrowers hold mortgages below 4% while current mortgage rates are near 6.7%, limiting refinancing and prepayment risk; carry, rather than spread tightening, is expected to drive returns in the second half of 2026.

Takeaway: Investors should consider extending from short-duration exposure into core or core-plus bonds, while recognizing risks from higher Treasury yields, persistent credit supply, CCC weakness and increased rate volatility affecting Agency MBS.