Easy Income Portfolio: October 2026 Edition

This has not been a fun stretch for income investors.

Treasury yields have jumped, and prices have fallen across preferred stocks, mortgage securities, closed-end funds and other investments people own for income.

A few weeks ago, the 10-year Treasury yield reached its highest level since 2002. Then the September inflation report pushed it briefly above 5.3% again.

The report showed inflation running at 3.7% over the past year, up from 3.4% in August. Higher gasoline prices did much of the damage, but investors also saw enough to worry that inflation could stick around.

That brought the possibility of another Federal Reserve rate increase back into the conversation.

Investors are also weighing the cost of government borrowing, higher energy prices and the enormous amount of money flowing into artificial intelligence infrastructure. There is plenty for the bond market to worry about, and it has been acting accordingly.

The hit to portfolio values is real.

The 10-year Treasury yield climbed about 85 basis points in the third quarter, and the broad U.S. bond market fell 3.5%. Bank of America reported that unrealized losses on its Treasury, agency and mortgage securities had increased to $109 billion at the end of September, up from $85 billion three months earlier.

Those numbers show how much rising rates can hurt the quoted value of a bond portfolio.

They do not tell us, by themselves, whether the securities will keep paying.

That distinction matters for us.

A falling price caused by higher interest rates is not the same as a borrower missing payments or a fund paying out more than its investments earn. We have to keep an eye on both, but they are different problems.

The first can improve if rates come down. The second requires us to take a hard look at credit quality and cash flow.

A Portfolio With Several Sources of Income

The Easy Income portfolio owns a mix of funds and income vehicles covering preferred stocks, loans, mortgages, real estate, energy and international bonds.

That gives us several ways to earn income. It also means many of our holdings can get hit at the same time when investors demand higher yields.

The current spreadsheet shows distribution yields ranging from 5.1% for Simplify MBS ETF (MTBA) to 16.3% for Special Opportunities Fund (SPE).

Those numbers catch your eye, but they are not the whole story.

A fund’s distribution rate does not always equal the income its investments earn. Leverage, options, realized gains and return of capital can all affect the amount paid.

A high distribution is a reason to ask more questions, not a reason to stop asking them.

With that in mind, let’s look at the different sources of income in the portfolio and how the current interest-rate environment affects each one.

Credit Income: BDCs, Senior Loans and Bonds

Our credit exposure includes VanEck BDC Income ETF (BIZD), WisdomTree Private Credit and Alternative Income Fund (HYIN), State Street Blackstone Senior Loan ETF (SRLN) and Infrastructure Capital Bond Income ETF (BNDS).

These holdings give us different ways to earn credit income, from loans made directly to middle-market companies to traded bonds and alternative credit investments.

BIZD invests in business development companies, while HYIN provides exposure to alternative income and credit vehicles. SRLN owns senior secured, floating-rate loans, and BNDS focuses on current income through bond investments, including infrastructure-related opportunities.

Floating-rate loans have an obvious appeal when interest rates rise: their coupons can reset higher.

The catch is that borrowers have to pay those higher rates, too.

A company with steady cash flow may manage that just fine. A weaker borrower may find that the larger interest bill becomes a real problem.

That is one reason investors have become more cautious about BDCs.

Many trade below their reported net asset value, reflecting concerns about borrower health, loan valuations and whether dividends are fully covered.

Discounts can create opportunity, but only when the underlying loans are worth what the fund says they are worth.

The yield is not the analysis.

BNDS adds infrastructure-related bond exposure. Infrastructure investment may create attractive lending opportunities, but those bonds still move with interest rates and credit conditions.

It is a different source of income, but the same need to watch the balance sheet and the price we pay.

Mortgages and Real Estate: Different Investments, Different Risks

Our mortgage and real estate exposure comes through Simplify MBS ETF (MTBA), iShares Mortgage Real Estate ETF (REM) and Nuveen Real Asset Income and Growth Fund (JRI).

These holdings all touch real estate, but they do it in different ways.

MTBA owns mortgage-backed securities. REM owns mortgage REITs that finance residential and commercial property. JRI holds a broader portfolio of real assets.

Higher mortgage rates have slowed refinancing activity. That can leave mortgage securities outstanding longer than investors expected, making them more sensitive to further rate increases.

Mortgage rates recently reached roughly 7.4%, which is not exactly an invitation for homeowners to refinance.

The selloff has improved prospective yields, but we still need to understand each fund’s duration, prepayment exposure and credit risk.

Commercial real estate has a tougher problem.

Owners with loans coming due may have to refinance at much higher rates, and some properties are worth less than they were when the loans were made.

Office remains the sore spot, although problems exist in other property types as well.

Higher rates do not explain every troubled loan, but they make it harder for borrowers to get through refinancing.

Community bank debt and commercial mortgage-backed securities also deserve attention, even though the spreadsheet does not identify a separate dedicated position in either category.

With community bank debt, we care about deposits, capital, loan quality and exposure to commercial real estate.

With CMBS, we need to look past headline delinquency rates and examine which properties and loans are actually in trouble.

A rate-driven price decline is not automatically a credit loss, but higher rates can turn refinancing pressure into one.

Preferred Stocks and Financial Income

Virtus InfraCap U.S. Preferred Stock ETF (PFFA), Angel Oak Financial Strategies Income Term Trust (FINS) and ArrowMark Financial Corp. (BANX) provide exposure to preferred capital and financial assets.

Their returns depend on both market interest rates and the health of the underlying issuers and investment portfolios.

Preferred stocks have taken a beating because many pay fixed dividends.

When new bonds and Treasuries offer higher yields, an existing preferred has to fall in price to compete.

That is painful for current holders, but it can create opportunities for investors buying at lower prices.

A preferred trading below par can offer an attractive combination of income and potential price recovery if rates eventually decline.

We still need to check the issuer’s financial strength, the security’s call date and any reset provisions.

Preferreds sit below debt in the capital structure, and some dividends can be deferred or suspended.

The yield is attractive only if the issuer can keep paying it.

That is the distinction we need to make throughout the portfolio. A security can become cheaper because rates have moved against it, or because its ability to generate cash has deteriorated.

Those are very different investment situations.

Energy Income: Infrastructure and Royalties

Our energy exposure comes through Tortoise Energy Infrastructure Corp. (TYG) and Dorchester Minerals LP (DMLP).

Both give the portfolio exposure to energy, but their cash flows come from different places.

TYG invests in energy infrastructure through a closed-end fund. Midstream businesses earn much of their revenue moving and processing oil and natural gas.

DMLP is a mineral and royalty partnership. Its cash flows are more directly tied to production and commodity prices.

DMLP’s reported profitability and low debt are encouraging. Its distributions, however, can move around with production volumes and commodity prices.

That is part of the bargain with royalty investments.

Energy also connects these holdings to the broader interest-rate story.

Higher oil and gas prices can boost royalty income, but they can also push inflation higher and put more pressure on interest rates.

The same energy move can help one part of the portfolio’s cash flow while hurting the market value of preferred stocks and bonds elsewhere.

That is one reason we want different sources of income rather than depending on a single economic outcome.

Closed-End Fund Discounts and International Bonds

Special Opportunities Fund (SPE) and Saba Closed-End Funds ETF (CEFS) give us exposure to discounted closed-end funds and the potential for those discounts to narrow.

SPE invests in other closed-end funds and securities its manager believes are undervalued.

CEFS also looks for closed-end funds trading below net asset value and can hedge interest-rate and broader market exposure.

Both offer the potential to benefit when discounts narrow.

There is no guarantee that happens.

Discounts can remain wide for long periods, especially when investors are rushing away from leveraged funds.

The opportunity is to buy assets at prices that compensate us for the uncertainty while collecting income as we wait.

abrdn Asia-Pacific Income Fund (FAX) adds another source of diversification through Asia-Pacific bonds.

That gives us exposure to a different set of economic and currency risks.

Japanese yields have risen, prompting local investors to buy more domestic bonds and sell some foreign debt. That shift can affect bond markets well beyond Japan.

International exposure can diversify the portfolio, but it does not make interest-rate and currency swings disappear.

Bank risk-transfer securities in the United States and Europe are another area worth watching.

These transactions allow banks to transfer some credit risk on loan portfolios to outside investors. Europe has the more established market, while U.S. activity is growing as regulations become clearer.

The structures can offer attractive income, but they are complicated.

We need to know which loans back the deal, where losses begin and how those losses are allocated.

The spreadsheet does not identify a dedicated risk-transfer holding, so this remains an area of interest rather than a direct position in the listed portfolio.

Two Ways AI Could Bring Interest Rates Down

Apollo’s Torsten Slok has laid out an intriguing longer-term possibility.

Today’s bond market is focused on inflation, energy and government borrowing.

Looking toward 2027, Slok sees two very different ways the AI story could play out, and both could lead to lower long-term interest rates.

The first scenario is that AI disappoints.

If artificial intelligence fails to deliver the productivity gains and earnings growth investors expect, businesses may pull back on spending.

Growth could weaken, valuations could reset and interest rates could fall as economic activity slows.

The second scenario is that AI succeeds.

If AI delivers meaningful productivity gains, companies could produce more with the same resources.

That could help contain inflation and eventually bring interest rates down as well.

Those outcomes would look nothing alike for businesses or stock investors.

But either could ease pressure on long-term Treasury yields.

That is not much comfort if rates keep climbing in the near term, especially if energy prices continue feeding inflation.

It does remind us that today’s bond-market story is not the only possible one.

Portfolio Outlook: Collect the Income and Stay Selective

The opportunity today is not simply to buy whatever has the biggest yield printed beside its ticker.

It is to find income supported by assets and borrowers capable of making the payments.

High-quality, high-yield bonds and preferred stocks look especially interesting from today’s starting point.

Their yields are higher than they were before the selloff, and a decline in rates could add price appreciation to the income we collect.

Preferreds purchased below par offer the same two potential sources of return, provided the issuer remains sound and the terms work in our favor.

There is still plenty that can go wrong.

Rates could stay high. Inflation could prove stubborn. Borrowers may struggle with refinancing. Some funds may have to adjust distributions.

We need to keep checking credit quality and distribution coverage rather than letting an eye-catching yield do the thinking for us.

For now, the Easy Income portfolio is doing what we built it to do: collecting income from several different sources while the market sorts out interest rates.

The price declines are unpleasant, but higher yields improve the opportunity for new purchases and reinvested income.

If rates stay high, the cash flow helps carry us.

If rates eventually fall, today’s lower prices could make that income even more valuable.