Davidson Investment Advisors’ first-quarter commentary provides insights into the U.S. equity, taxable fixed income, municipal fixed income, and international equities markets.
U.S. Taxable Fixed Income Market
Geopolitics and the Price of Uncertainty
In the first quarter of 2026, taxable fixed income was shaped less by domestic economic data and more by events unfolding well beyond U.S. borders. Intermediate bonds, as measured by the Bloomberg Intermediate U.S. Government/Credit Index, declined 0.02% for the quarter, as higher rates and modestly wider credit spreads weighed on performance. Short- and intermediate-term yields moved higher, with the 5-year U.S. Treasury yield rising from 3.73% at year-end to 3.94% by quarter-end, serving as a useful proxy for the repricing of the front and belly of the curve. What had been expected to be a quarter of falling rates instead became a reminder that even intermediate bonds remain sensitive to shifts in inflation expectations and policy outlooks.
Geopolitics was the dominant macro theme of the quarter. While developments in Greenland and Venezuela drew attention, events surrounding Iran proved most consequential for global markets. Escalating tensions and the effective closure of the Strait of Hormuz raised the specter of a sustained oil supply shock, driving energy prices higher and reviving inflation concerns. While a resolution to the conflict appears possible from today’s vantage point, both timing outcome remain uncertain, leaving energy markets — and inflation expectations — vulnerable to further disruption.
The impact of these concerns was visible in credit markets. Corporate credit spreads widened modestly over the quarter, with BBB-rated bonds expanding from roughly 1.00% over comparable Treasuries at year-end to approximately 1.16% by quarter-end. At the same time, market expectations for Federal Reserve policy shifted meaningfully. Entering the year, investors anticipated several rate cuts in 2026; by the end of March, expectations had moved toward Fed inaction. Even so, intermediate interest rates remain within the broad trading range established over the past three years — a range that increasingly reflects growing unease about the durability of economic growth rather than fears of runaway inflation alone.
Beneath the surface, concerns around liquidity and private credit also gained prominence. Isolated instances of gating and redemption limitations reminded investors that liquidity in private markets can disappear precisely when it is most needed. These developments sparked renewed debate about valuation transparency, risk premiums, and the role private credit should play alongside publicly traded bonds, particularly as spreads in public markets have begun to widen from historically tight levels.
Finally, the quarter reignited a broader debate about the future path of inflation. Optimism around productivity gains from artificial intelligence and technological investment continues to build, but those potential benefits must now be weighed against the inflationary pressure of higher energy costs. Whether efficiency gains and the near-term economic activity driven by the AI build out can offset the economic drag of sustained elevated oil prices remains an open question.
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