Treasury rally accelerates on weak jobs data

Weekly fixed income update highlights

• Treasuries, taxable munis, CMBS, high yield corporates, senior loans, CLOs and emerging markets all rallied.
• Investment grade corporates, MBS and preferreds all had positive returns and outperformed similar-duration Treasuries.
• Municipal bond yields declined. New issue supply was $7.5B, and fund inflows were $672 million. This week’s new issuance is $9.9B.

U.S. Treasury yields declined further as labor market data revealed continued economic slowing. With unemployment rising, markets are pricing in six U.S. Federal Reserve rate cuts through 2026. Thursday’s inflation data will provide crucial insight ahead of the Fed’s next meeting.

Watchlist

• Treasury yields declined and remain near our year-end targets.
• Spread sectors were mixed versus Treasuries as the economic outlook remained murky.
• We expect the technical environment for municipal bonds to improve over the remainder of the year.

Investment views

We believe fixed income yields generally present a very attractive entry point, creating compelling income opportunities.

Downside economic risks are material, despite strong fundamentals, with tariffs likely to compress consumer spending and weigh on business fixed investment. But a U.S. recession is not our base case.

Risk premiums may widen further, with entry points likely to become more attractive over the coming quarters. Duration is likely to reassume its role as a growth hedge.

Key risks

• Tariffs further undermine consumer and business confidence, raising prices while weighing on sentiment and activity.
• Inflation fails to continue moderating as expected, weighing on asset prices.
• Geopolitical flare-ups intensify around the world.

Investment grade corporates see heavy issuance and sizeable demand

U.S. Treasury yields declined sharply last week, with the 10-year yield falling -15 basis points (bps) to 4.08% — the lowest level since early April’s tariffdriven volatility. 2-year yields dropped -11 bps, and markets now anticipate nearly three Fed rate cuts this year and three more in 2026. The primary driver was disappointing employment data, with nonfarm payrolls adding just 22,000 jobs in August. Previous months were revised lower again, with June now showing the first monthly employment decline since 2020. The unemployment rate rose to 4.3%, as expected. Thursday’s CPI report will provide the final data point before the Fed’s next meeting. We expect another elevated reading as tariffs continue pressuring core goods prices higher.

Investment grade corporates gained substantially, returning 1.17% for the week and beating similar-duration Treasuries by 17 bps. Spreads tightened -2 bps even as yields fell sharply. The technical backdrop was very supportive, with a sizeable inflow of almost $10 billion. At the same time, new issuance was heavy, but ultimately less than feared, with a total of just over $63 billion pricing. With healthy demand competing for limited supply, those deals were oversubscribed by an average of 4x, resulting in skinny average concessions of around 1.4 bps.

High yield corporates also advanced, returning 0.32%. Spreads were flat, near their recent tight levels, though the asset class lagged similar-duration Treasuries by -4 bps. Senior loans returned 0.16%. Both asset classes mirrored the dynamic in high grade corporates, with healthy supply and robust demand. Almost $10 billion priced in high yield, including $5 billion on Wednesday, which was the busiest day in three months. Senior loans saw around $5 billion of new issuance. Both asset classes enjoyed inflows, totaling $250 million and $307 million in high yield bonds and senior loans, respectively.

Emerging markets gained, returning 0.68%, though they lagged similar-duration Treasuries by -18 bps. Spreads were close to flat, as high yield names tightened -8 bps and investment grade widened 4 bps. Supply was healthy at $22.6 billion, mostly in high grade markets, and those deals were 4x oversubscribed on average. Inflows were very robust, totaling $938 million.

Municipal bonds remain well-supported despite heavy supply

Municipal bond yields also declined substantially last week, with short-term yields ending -9 bps lower and long-term yields falling -18 bps. New issuance was light due to the U.S. holiday. Fund flows remained positive, including open-ended fund inflows of $635 million. This week’s new issue supply should be well received.

The municipal market continues to see strong demand. A constructive Treasury environment supports municipal bonds, while heavy supply appears to be moderating in the near term. Demand remains robust, driven by tax-exempt yields that are compelling both historically and relative to taxable alternatives. Intermediate municipals are available at 4% tax-exempt yields, while long-term quality bonds offer 5% taxexempt yields. Given the steep yield curve, tax-exempt investors may want to consider extending duration to capture additional yield.x

Dormitory Authority of the State of New York (DASNY) issued $2 billion personal income tax revenue bonds (rated Aa1/NR). Strong investor reception drove several maturities to trade at substantial premiums in secondary market activity.

High yield municipals attracted continued inflows last week as market momentum turned increasingly positive. While average yields declined -8 bps, high-beta credits like Buckeye Tobacco 5% bonds experienced more pronounced tightening of -18 basis points. Puerto Rico Electric Power Authority (PREPA) bonds continued their price rally amid growing recovery optimism. Next week’s lighter supply calendar should drive further market tightening given sustained inflows. The Chicago Board of Education’s sizable new issue will test investor appetite and establish pricing levels for a credit facing ongoing fiscal challenges and future borrowing needs.

High yield corporates saw $5 billion in issuance on Wednesday alone, the busiest day in three months.

In focus: High yield bonds offer healthy payouts, firm fundamentals

Among liquid taxable fixed income sectors, high yield bonds continue to deliver high levels of income, even as default risk is structurally contained due to the market’s higher quality nature. Nuveen’s leveraged finance credit research team, one of industry’s largest, allows portfolio managers to identify attractive opportunities while mitigating downside risk through daily reunderwriting and rigorous risk management.

We continue to see value in high yield bonds, with a yield-to-worst of 6.70%. Market fundamentals remain strong, with default rates still below their longterm average. Issuers generally maintain solid balance sheets and repayment capabilities, with average new debt/ EBITDA (earnings before interest, taxes, depreciation and amortization) of less than 4X, a sign issuers are managing leverage responsibly. Although high yield spreads have compressed, we believe they reflect fair value relative to overall credit risk, the major risk faced by high yield investors.

Regarding the impact of a Federal Reserve rate cut next week, which we anticipate, base rates should stay elevated — offering an attractive entry point into the asset class. In our view, rate cuts may bolster fundamentals of select companies, potentially allowing credit selection and active management to drive outperformance.