Yields Climb as Oil, Debt Supply, and a Tighter Fed Reshape Fixed Income

Higher real yields and attractive starting income make fixed income increasingly compelling despite risks from oil, debt supply, and a tighter Federal Reserve.

• Fixed-income yields rose sharply in the third quarter as higher oil prices, increased borrowing to fund the AI buildout and the U.S. fiscal deficit, and a September Fed rate hike pushed rates higher.
• The federal funds target rose 25 basis points to 3.75%–4.00%, while the 10-year Treasury yield increased from 4.5% to 5.3% and the 10-year AAA municipal yield from 2.9% to 4.1%.
• The Bloomberg U.S. Aggregate Bond Index returned -4%, the Bloomberg Municipal Bond Index -6%, and the S&P 500 2%; the oil forecast shifted from roughly $70 to near $90 per barrel of WTI by year-end as markets priced a longer Iran conflict.
• Almost all the increase in Treasury yields came from real yields, with the 10-year real yield rising from 2.2% to nearly 3%, while 10-year TIPS breakeven inflation moved only from 2.25% to 2.37%.
• Current starting yields are about 5.3% for Treasuries, 6.2% for corporate bonds, 7% on a taxable-equivalent basis for municipal bonds, and 8.4% for high yield; high-quality municipals offer roughly a 1% advantage over corporate bonds with higher average credit quality.

Takeaway: Riverbridge favors fixed income on valuation grounds, especially high-quality municipals, but warns that an extended war and persistently higher oil prices could drive rates higher; a conflict resolution and reopening of the Strait of Hormuz would likely have the opposite effect.