4Q2026 Summary of Positioning & Monthly Market

Fourth Quarter 2026

U.S. Treasuries

Treasuries are utilized in barbelled fixed-income portfolios as an offset to risks presented by credit-sensitive sectors.

Positioning

• (+) In intermediate-term portfolios, the team remains short duration relative to the benchmark (the “Agg”), while maintaining a steepening bias. We expect resilient economic growth to reinforce the view that the long-run neutral rate might be higher than previously assumed. At the front end, following sharp third quarter repricing and the Federal Reserve’s September rate hike, we believe much of the expected near-term tightening is already reflected in valuations. This leaves us relatively more constructive on the front end than the long end, as we believe front-end yields have more room to retrace if tightening expectations are reduced due to softer labor-market conditions or moderating inflation pressures. At the same time, longer-term yields should remain under pressure from persistent fiscal deficits, elevated Treasury issuance, and upward pressure on term premiums.
• (+) In short-term portfolios, duration is neutral relative to the benchmark. While front-end valuations have become more attractive following the quarterly repricing, Fed Chairman Kevin Warsh’s preference for less forward guidance and a more data-dependent policy framework has widened the distribution of potential policy outcomes and increased front-end volatility. We therefore prefer to remain neutral on duration until there is greater clarity on inflation, labor-market conditions, and the pace of any additional tightening.
• (–) Remain cautious on the long end of the Treasury curve. Persistent fiscal deficits, a rising debt-to-GDP ratio, elevated Treasury supply, and reduced structural demand for duration will likely keep real yields and term premiums elevated. Geopolitical uncertainty and continued volatility in energy markets add to the risk premium, while Treasury buybacks have so far provided greater support for market functioning than for the outright level of long-term yields. We expect longer-maturity Treasuries to remain vulnerable even if the Fed ultimately delivers less tightening than currently priced.

Agency Mortgage-Backed Securities

Alpha-generation opportunities exist through pass-through (PT) coupon and collateral selection as well as mispricing in collateralized mortgage obligations.

Positioning

• (+) 1.5% to 3.0% coupons, in particular stories that we feel may have potential upside in prepayments among a sector that is still deeply discounted
• (+) 5.5% to 6.0% coupons that might offer attractive carry and spread with certain characteristics that could mute prepayments
• (+) Agency derivatives that could offer higher yields or increased carry with minimal duration risk due to the difference between the rate on the loans in the mortgage-backed securities (MBS) market and current mortgage rates
• (+) Agency floaters (higher cap). Historically wide discount margin and a way to take advantage of cheapness in higher coupons without taking on duration risk
• (–) Belly coupon PTs (3.5s and 4.0s) at their tights on a spread basis and offering poor convexity/yield potential relative to other portions of the coupon stack

U.S. Investment Grade Corporates

We employ a bottom-up approach that selects securities based on fundamental credit research focused on stable-to-improving credits with durable enterprise values in growing industries, supplemented by the firm’s macroeconomic outlook.

Positioning

• (+) Utility hybrids: defensive cash flows, regulated earnings visibility and yield pick-up
• (+) Midstream: contracted, fee-based cash flows, disciplined capex, low leverage, and LNG and power-driven gas demand
• (+) Equipment rental: infrastructure and data center demand, with flexible capex that converts to free cash flow in a slowdown and scale driving share gains
• (–) Retailers: value-seeking consumers and tariff-driven margin pressure limit balance sheet repair
• (–) Beverage: soft volumes from consumer trade-down, higher input costs, and debt-funded M&A delaying paydown
• (–) Software: AI disintermediation risk and debt-funded shareholder returns

U.S. High Yield Corporates

The team engages in a rigorous research and due-diligence process to identify attractive companies in growing industries and enhances its fundamental views with the firm’s robust macroeconomic research and insights.

Positioning

• (+) AI infrastructure credits tied to the highest-quality counterparties with the strongest contracts
• (+) Gaming and leisure where we find recession-resilient business models and/or defensive balance sheets
• (+) Independent (upstream) companies that may benefit from the current commodity environment and have very conservative balance sheets
• (–) Cable and satellite due to intense competition for broadband from fixed wireless and fiber as well as for video from streaming services
• (–) Levered building product companies amid persistent housing market weakness elevating risk of restructurings
• (–) AI infrastructure credits tied to weaker counterparties or most exposed to long-term demand for compute

U.S. Bank Loans

The team pairs DoubleLine’s robust macroeconomic insights with fundamental credit analysis to identify attractive companies in growing industries.

Positioning

• (+) Power companies with robust demand for electricity
• (+) Consumer services companies across gaming, travel and entertainment given the strength of the “experience economy”
• (+) Midstream energy credits with durable long-term contracts operating in a favorable energy-price environment
• (–) Software companies that do not have market-leading positions and compete against better-capitalized peers
• (–) Cable and telecommunications credits exposed to shifting consumer demand
• (–) Housing-exposed credits given the impact of persistently elevated mortgage rates

Non-Agency Residential MBS

Bond structures and future expected cash flows drive security selection based on the investment team’s outlook on the direction of the economy, interest rates and the housing market.

Positioning

• (+) New-issue non-qualified mortgages with all-in yields of approximately 6.2% for bonds rated AAA and approximately 7.2% for bonds rated BBB
• (=) Neutral stance on credit risk transfer deals due to relatively tight spreads
• (–) Higher loan-to-value (LTV) ratios that likely underperform in an economic slowdown
• (–) Collateral with higher operator risk, such as residential transition loans

Non-Agency Commercial MBS

Careful curation of collateral, coupled with active management of property sector exposure, may have the potential to enhance absolute and risk-adjusted returns across differing economic environments.

Positioning

• (+) Emphasize selectively sourced primary market issuance across conduit, SASB and CRE CLOs, prioritizing structures with strong partnership, conservative leverage and transparent collateral profiles
• (+) Maintain a bias to senior, fixed- and floating-rate exposure, where flat credit curves make higher-quality exposure more attractive on a risk-adjusted basis, particularly when spreads remain compelling relative to fundamentals
• (–) Remain cautious on lower-rated non-Agency commercial MBS, where limited spreads provide insufficient compensation for incremental credit, liquidity and extension risk
• (–) Underweight exposures with heightened refinancing or cash-flow sensitivity, particularly in rate-sensitive property types or sectors facing secular or cyclical headwinds

Collateralized Loan Obligations

The team uses a three-pronged approach analyzing the collateral, structure and manager.

Positioning

• (+) Selectively buying AAA and BBB tranches that screen as attractive based on spread, dollar price and underlying credit fundamentals
• (+) Focusing on clean portfolios in well-structured deals from high-quality managers with a proven ability to outperform across a variety of market environments
• (+) Focusing on shorter AAAs from CLO refinancings to take advantage of a flat-to-inverted term curve
• (–) Being selective in BBs due to weaker structure (thin tranche), tight spreads and elevated tail risk in the loan market. Within mezzanine, we continue to be selective and focus on up-in-quality deals

Asset-Backed Securities

We employ a holistic approach that encompasses all asset-backed security (ABS) subsectors and invests up and down the entire capital structure, which helps our team identify the most opportune investments, potentially maximizing returns while minimizing risk for our investors.

Positioning

• (+) Short-duration, high-quality consumer deals priced off attractive front-end Treasury rates that could offer higher yields than other investment grade (IG) products
• (+) Amortizing home improvement ABS that cater to super-prime homeowners who are benefiting from record levels of home equity
• (+) Hard-asset securitizations with strong liquidity profiles within infrastructure-related industries that exhibit stable cash flows
• (+) Senior and mezzanine aviation ABS where the underlying collateral has seen a meaningful rebound in valuations due to production delays with original equipment manufacturers
• (–) Subprime consumer deals where delinquencies and defaults have continued to trend higher
• (–) Subprime auto loans rated below IG with high LTV ratios and deteriorating fundamentals
• (–) Tier 2 and lower franchise royalty securitizations, particularly those operating in consumer-based industries (e.g., quick-service dining), which have come under pressure with rising labor and commodity expenses

Infrastructure

The team carries out detailed due diligence and bottom-up credit analysis to identify attractive securities in the broad infrastructure sector, guided by the firm’s top-down macroeconomic research process and insights.

Positioning

• (+) Aircraft lessors benefiting from strong demand and weak supply resulting in healthy cash flows and market dynamics
• (+) Midstream bonds with strong service-based contracts and limited or no exposure to commodity prices
• (+) Utilities with regulated business models and healthy balance sheets, rotating low-coupon post-COVID-19 bonds into newer-vintage bonds with higher coupons
• (+) Industrial infrastructure such as domestic battery and semiconductor manufacturing facilities with compelling competitive dynamics
• (–) Long-duration legacy bonds

Emerging Markets (USD)

The team implements a time-tested five-step investment process that combines bottom-up research with sovereign macroeconomic overlays. Through scenario analysis, we link credit fundamentals with market valuations to guide portfolio construction and investment decisions.

Positioning

• (+) New-issue opportunities where spreads include an attractive new-issue premium
• (+) Subordinated bank debt issued by financial institutions with strong capital ratios and a demonstrated history to calling securities at the first call date, thereby preserving market access, maintaining capital efficiency and mitigating extension risk
• (+) Select mining credits, particularly copper producers, supported by favorable long-term supply-demand dynamics
• (–) GCC credits, given ongoing uncertainty surrounding the duration and potential escalation of the Iran-U.S. conflict, which could increase geopolitical and market volatility
• (–) Credits facing substantial capex requirements, elevated refinancing risk, weakening liquidity profiles, and/or persistent negative free-cash-flow generation that could pressure credit fundamentals

Emerging Markets Local Currency

The team pairs global macroeconomic research with bottom-up fundamental analysis to help find attractive bond and currency investments across emerging markets (EM) countries.

Positioning

• (+) EM FX, as a range-bound U.S. dollar will support EM currencies. Overweight EM FX of countries with positive terms-of-trade shocks and high real rates. Resilient global growth has supported the non-dollar trade. Themes of repatriation flows are longer-term bullish for low-yielding, current-account-surplus countries, though these currencies might be pressured in the short term by higher real U.S. yields.
• (+) Select Latin America and CEEMEA local currency bonds that have positive idiosyncratic country developments, such as new election cycles, and countries that are geographically distant from and/or have low trade exposure to countries with high geopolitical risks
• (–) Countries facing elevated geopolitical and balance-of-payments risks

Global Developed Sovereign

The team pairs global macroeconomic research with bottom-up sovereign fundamental analysis to construct a diversified portfolio to navigate various economic cycles and idiosyncratic country events.

Positioning

• (=) Non-U.S. developed market sovereign bonds, favoring the belly of local government rate curves. We expect front-end rates to reflect shifting central bank expectations for rate hikes. We expect longer-term rates might be pressured by rising fiscal and non-core inflation pressures.
• (–) Short the broad U.S. dollar as we expect front-end U.S. Treasury yields fully reflect the expectation of near-term rate hikes. Improvement in the geopolitical outlook could ease inflation expectations, reprice Fed hikes and unwind some flight-to-safety trades in the dollar. Over the medium term, U.S. policy uncertainty could initiate a slow diversification away from the dollar by foreign investors. We are monitoring international repatriation flows out of the U.S. and rising hedge ratios, which would be bearish for the dollar.

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