Treasury yields are mixed as credit underperforms

Weekly fixed income update highlights

• Treasuries, municipal bonds and senior loans advanced last week.
• Investment grade and high yield corporates, preferreds and emerging markets retreated.
• Municipal bond yields remained essentially unchanged. New issue supply was $15.2B, and fund inflows were $1.3B. This week's new issuance is $8.2B.

U.S. Treasury yields were mixed last week amid the ongoing U.S. government shutdown, while credit spreads widened across sectors. Heavy new issuance overwhelmed investor demand despite strong corporate earnings and positive fund flows. Municipal bonds remained stable, supported by limited supply and consistent inflows.

Watchlist

• 10-year Treasury yields rose last week and are close to our year-end forecast.
• Spread sectors broadly lagged similar-duration Treasuries amid risk-off sentiment.
• 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.

Credit markets decline amid elevated supply and outflows

U.S. Treasury yields were mixed last week, with 10-year yields rising 2 basis points (bps) to 4.10%. The 2-year yield declined slightly while the 30-year yield rose 5 bps, resulting in a steepening of the yield curve. The U.S. government shutdown has now reached 40 days, making it the longest on record as it continues to disrupt economic data releases. In this data vacuum, attention has shifted to corporate earnings season, with most major companies reporting third quarter results. Overall, S&P 500 companies posted year-over-year earnings growth of 11.8%, comfortably exceeding expectations.

Investment grade corporates retreated again, returning -0.19% for the week and lagging similar-duration Treasuries by 24 bps. While inflows accelerated to $10.3 billion - the fourth largest weekly inflow of the year - the technical backdrop weighed somewhat on sentiment. Supply was elevated at nearly $60 billion in new issuance, materially exceeding expectations. After just the first week of November, the primary calendar had already reached roughly half the amount expected for the full month. Deals were oversubscribed by an average of 3x, though this resulted in wider new issue concessions than the recent trend at 6.3 bps. Overall, new issuance is running at almost $1.5 trillion this year, up 9% versus the 2024 pace.

High yield corporates also declined, returning -0.29% and underperforming similar-duration Treasuries by -46 bps. Senior loans returned 0.04%. In both asset classes, CCC and single B rated segments underperformed the BB rated segment, signaling risk aversion. New issuance was healthy at nearly $9 billion and $7 billion across high yield bonds and loans, respectively. Outflows picked up from high yield funds, with -$955 million exiting the market during the week, while loan funds saw steady outflows of -$137 million, similar to the prior week.

Emerging markets joined the selloff, retreating -0.06% and underperforming similar-duration Treasuries by -29 bps. Despite a weaker dollar, the asset class faced pressure from the same dynamics affecting U.S. corporates: risk-off sentiment and unfavorable technicals. Supply was heavy at nearly $22 billion, while outflows from emerging market bond funds accelerated to -$506 million.

Municipal demand continues as supply remains limited ahead

The municipal bond yield curve held steady last week. Short-term yields ended unchanged, while long-term yields declined -1 bps. The new issue calendar was well received, and fund flows were positive for the sixth consecutive week, including $440 million into exchange-traded funds. This week's new issue calendar should also be well received.

The muni market remains very well bid, supported by the strong Treasury bond market. We believe the supply and demand equation should continue to help bond prices. New issue supply is likely to be muted during November due to several U.S. holidays, while strong demand for municipal bonds persists. As well as six consecutive weeks of inflows, $35 billion in reinvestment money is expected in December. Munis should remain well bid through year-end.

Illinois Toll Highway Authority issued $500 million in senior revenue bonds competitively last week. The offering has closed and the bonds are now trading in the open market at prices slightly above where they were originally sold.

High yield municipal yields declined slightly on average last week as fund inflows re-accelerated. Investors contributed $277 million into high yield muni funds, representing nearly one-third of all municipal bond flows for the week. Nuveen is tracking another 15 high yield deals this week, including the largest continuing care retirement community deal in sector history to reposition and expand an existing project in Washington state.

Investment grade corporate issuance hit nearly $60 billion last week, already reaching half November's expected total.

In focus: Banks deliver the big beats

Third quarter earnings season is nearly complete for U.S. banks, and results have generally been better than expected — with a few caveats.

For example, JPMorgan, the largest U.S. bank by assets, reported year-over-year gains in debit/credit card sales volume and revenue (both +9%), while Bank of America, the second largest, also registered a hefty gain in revenue (+11%). Bank CEOs expressed concerns about persistent inflation, slowing jobs growth and bankruptcies in the auto industry. However, they noted that consumer loan delinquency rates remain low and consumer spending has stayed strong — a critical indicator since household spending accounts for about 70% of U.S. GDP.

Capital markets activity, including investment banking, were notable contributors to banks' third-quarter performance: Goldman Sachs posted a 42% surge in investment banking compared to a year ago, reflecting higher mergers & acquisitions (M&A) volume. M&A has heated up overall, which may produce more fee income for banks than typical net interest margin-associated earnings. Beyond boosting bank bottom lines, this upswing in activity benefits markets and the U.S. economy.

Banks have taken advantage of tight spread levels and robust demand for investment grade corporate paper to issue senior debt. Deals have been substantially over-subscribed, a sign of strong investor confidence, with limited new issue concessions.