The Takeaway
The Federal Reserve raised the federal-funds rate by 25 basis points to 3.75% to 4% at its September 2026 meeting, a first move after holding rates steady in June and July, lifting the base rates on leveraged loans.
The Bank of England held the Bank Rate at 3.75% in a 6–3 vote, with three members favoring a hike to 4%, and judged inflation risks tilted further to the upside. The European Central Bank raised its deposit facility rate by 25 basis points to 2.50%.
Treasury yields rose sharply in the third quarter 2026, led by the two- to seven-year segment (+85 basis points on average), while long-term yields rose 78 basis points and yields out to one year 38 basis points, steepening the curve out to 10 years.
Leveraged loans posted positive returns, driven mainly by coupon income and supported by a rebound in software loan prices. The Morningstar LSTA US Leveraged Loan Index delivered the highest returns of 1.95%, followed by the Morningstar Global Leveraged Loan Index at 1.73% and the Morningstar European Leveraged Loan Index at 1.07%.
The Morningstar Leveraged Loan Monitor for Q3 2026 delivers an in-depth analysis of the leveraged loan market, with a focus on the US, European, and global indexes. Central banks resumed tightening during the quarter: the Federal Reserve and the European Central Bank each raised rates by 25 basis points in September, and Treasury yields rose sharply across the curve. Against this backdrop, floating-rate leveraged loans delivered positive returns, driven mainly by coupon income and supported by a rebound in software loan prices on both sides of the Atlantic. The Morningstar LSTA US Leveraged Loan Index led with a return of 1.95%, followed by the Morningstar Global Leveraged Loan Index at 1.73% and the Morningstar European Leveraged Loan Index at 1.07%. Yields rose in both regions on higher base rates, while spreads diverged: US spreads widened 12 basis points to 486 basis points, exceeding European spreads for the first time since July 2024. Issuance declined in both regions, with US volumes falling to USD 172 billion from USD 185 billion and European issuance to EUR 53 billion from EUR 62 billion, led by capital goods. Leveraged loans have also outperformed traditional fixed income in 2026, as rising rates weighed on Treasuries and investment-grade corporate bonds.
Exhibit 4: Third-Quarter 2026 Performance
Source: Morningstar Indexes. Data as of Sept. 30, 2026. TR LCL Variant
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