Treasury yields tread water amid uncertainty

Weekly fixed income update highlights

• Treasuries were the only sector that posted positive total returns.
• Investment grade and high yield corporates, preferreds, structured products and emerging markets all underperformed Treasuries.
• Municipal bond yields ended the week higher. New issue supply was outsized at $10.5B, and fund outflows were -$371M. This week’s new issuance remains robust at $11B.

U.S. Treasury yields were mostly unchanged at the close of last week, but intra-week volatility was significant as the market continued to assess U.S. economic and policy uncertainty.

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Watchlist

• 10-year Treasury yields were nearly unchanged, and we expect yields to remain range bound during 2025.
• Spread sectors broadly underperformed Treasuries, reflecting continued concerns about the U.S. economic and policy outlook.
• We expect the technical environment for municipal bonds to remain strong this year.

Investment views

Rates are set to stay higher for longer, as the Fed approaches rate cuts cautiously.

The underlying growth outlook remains healthy thanks to strong consumer balance sheets and solid levels of business investment. This combination should keep corporate defaults low.

Risk premiums may widen further, with entry points for taxable fixed income likely to become more attractive over the coming quarters. Credit selection remains key as we search for bonds with favorable income and solid fundamentals.

Key risks

• Inflation fails to continue moderating as expected, weighing on asset prices.
• Policymakers unsuccessfully juggle fighting inflation with supporting economies still struggling to gain traction.
• Geopolitical flare-ups intensify around the world.

Investment grade corporate issuance is active despite volatility

U.S. Treasury yields were mostly unchanged at the close of last week, but volatility was significant as the market continued to assess economic and policy uncertainty. Treasuries rallied to start the week, responding to comments from President Trump over the weekend about the “period of transition” due to large policy changes. The market interpreted this as near-term pain and elevated recession probabilities. Treasuries reacted to multiple headlines, between tariff announcements, softer-than-expected CPI and PPI data and a looming government shutdown that was ultimately averted on Friday. Outside of the U.S., the Bank of Canada cut its policy rate by 25 basis points (bps) to 2.7%.

Investment grade corporates retreated, returning -0.27% for the week and underperforming similar-duration Treasuries by -34 bps. Volatile spreads closed the week 6 bps higher at 93 bps. Inflows sharply declined to $1.8 billion, the lowest weekly inflow this year. Despite the elevated volatility, the market was active with $36 billion in new issuance pricing Monday through Wednesday. However, elevated volatility sidelined issuers for the final two days of the week. Deals were still met with robust demand, averaging oversubscription rates of 4x. However, concessions moved higher to 7 bps, well above the average of 3.1 bps year-to-date.

High yield corporates also declined, returning -0.67% and underperforming similar duration Treasuries by -72 bps, making it the week’s weakest performing sector. Senior loans returned -0.33%. Both asset classes saw higher-quality segments outperform, continuing the trend of the last several weeks. New issuance in both high yield and loans was muted, totaling $3.8 billion and $8.7 billion, respectively. Both high yield and loans saw outflows of -$568 million and -$1.1 billion, respectively.

Emerging markets weakened -0.22% and underperformed similar-duration Treasuries by -28 bps. High yield and investment grade hard currency sovereigns saw similar spread widening. However, within the corporate space, higher quality marginally outperformed lower quality. Local markets eked out a 0.06% return, helped by a weaker dollar. Outflows for the sector totaled -$1.2 billion, led by hard currency outflows. Given the elevated volatility, supply was once again muted at $7.7 billion.

High yield municipal fund flows remain positive

Municipal bonds sold off dramatically last week. Short-term yields rose 6 bps, and long-term yields rose 16 bps. Supply was outsized and fund flows were negative for the first time in eight weeks, including exchange-traded fund outflows of -$294 million. This week’s new issue calendar remains outsized. With unsold balances from last week’s deals and outsized supply this week, we expect the munis to be challenged.

Muni new supply has reached a record $100 billion year-to-date. The 2025 total is expected to be top $500 billion, another record. Fortunately, the municipal market has seen substantial new inflows as well so far this year. But redemptions returned last week, and this tepid demand may remain for the foreseeable future. People and corporations are redeeming holdings to pay taxes. However, munis yields are at the highest levels in two years, which should maintain investor interest in the asset class.

Illinois issued $231 million Build Illinois Bonds (sales tax revenue bonds, rated A/A+). Some bonds eventually traded cheaper in the secondary market from where they were issued. For example, 5% coupon bonds due in 2042 came at a yield of 4.07% and traded in the secondary market at 4.20%.

High yield municipal bond yields have increased 18 bps on average in March, compared to 28 bps for long AAA muni yields. High yield muni fund flows remained positive last week, as they have been every week in 2025. These flows represent more than half of all flows into active muni bond funds yearto-date. These strong flows are applying persistent downward pressure on credit spreads. Even with the recent rate volatility, many new deals are being sold with reduced yields at final pricing. We have tracked on average more than 12 high yield muni deals per week over the last four weeks.

Both high yield corporates and senior loans saw higher-yielding segments outperform.

In focus: High yield hits its marks

High yield corporate bonds are again demonstrating their effectiveness as a diversifier amid the equity market selloff. The asset class has returned 1.1% year-to-date, versus -4.1% for the S&P 500, while offering yields above 7%.

And with an average duration of about three years, high yield bonds offer a potential cushion against interest rate volatility versus longer-duration assets. Investors have taken note of these positive points, with inflows totaling $6.5 billion year-to-date through 12 March.

Although credit spreads have widened in this latest risk-off environment, they remain tight, reflecting still-strong market fundamentals. Defaults are projected to stay below their long-term averages. The asset class benefits from a higher quality composition — nearly 50% of the outstanding debt is rated BB and only about 10% is CCC. Issuers generally have solid balance sheets, and supportive macroeconomic conditions further enhance the outlook. For these reasons, absent a severe economic downturn, we believe high-yield will continue to deliver attractive risk-adjusted performance.

That said, investors should remain vigilant, in our view, as policy uncertainties may cause performance to vary widely among sectors and issuers. But this should allow active managers with robust credit underwriting processes to take advantage of relative value opportunities and generate alpha in the liquid part of the market.