Market Recap – Q1 2026, “Strait to the Point”

The United States and Israel launched joint strikes on Iran at the end of February, triggering one of the largest oil supply shocks in history. The closure of the Strait of Hormuz prompted Brent and WTI crude oil prices to exceed $110/barrel. Runaway oil prices sent inflation expectations higher, and the yield on the 10-year Treasury rose 40 bps in the month of March.

The BEA third estimate of Q4 Real GDP was 0.5%, with consumer spending and investment contributing prominently. Headline inflation rose 0.87% in March, driven by a 21.2% monthly increase in gas prices. Core inflation increased to 2.6%, driven by apparel and transportation services. Unemployment increased versus a year ago while job openings totaled 6.9 million against 7.2 million unemployed.

The FOMC maintained the target range for the federal funds rate in Q1 at 3.50%–3.75%, citing a cooling labor market and inflation expectations remaining elevated. The Committee increased purchases of short-term treasuries to maintain ample supply of reserves.

Treasury yields moved higher across the yield curve in a near parallel shift in the first quarter. The short end outperformed the belly and long end.

Relative performance among spread sectors varied over the fourth quarter. Quality outperformed in corporates over the period. The risk premium over like-maturity Treasurys on BBB-rated corporate bonds within the Aggregate increased from 101 to 113 bps. Structured securities outperformed corporate bonds in Q1. Among securitized assets, agency mortgage-backed securities outperformed CMBS and ABS. Software remained in the spotlight, as a series of breakthroughs from AI labs stoked disruption fears in credits backed by recurring revenue. The prospect that AI could replace subscription-based software at a lower cost continues to weigh on private equity portfolio companies.

Market pricing implies the FOMC will hold the federal funds rate steady until the second half of the year, amid the uncertainty surrounding the war in Iran. Federal funds futures indicate 0.29% in expected rate cuts by year end 2026.