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Weekly Fixed Income Commentary

Labor market strength drives Treasury yields higher

Anders Persson
Chief Investment Officer, Head of Global Fixed Income
Dan Close
Head of Municipals
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Weekly fixed income update highlights

U.S. Treasury yields climbed last week as robust U.S. employment data outweighed mixed economic signals, with the May jobs report showing stronger-than-expected gains despite earlier private sector weakness.

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Watchlist

  • Treasury yields moved higher, and we continue to expect elevated volatility, a wider trading band and a modest rally from current levels.
  • Spread sectors gained substantially versus Treasuries as labor market data were stronger than feared.
  • We expect the technical environment for municipal bonds to improve as the year progresses.

Investment views

We believe fixed income yields generally present one of the best entry points in a generation, creating attractive income opportunities.

Downside economic risks are material, despite strong fundamentals, with tariffs likely to compress consumer spending and weigh on business fixed investment. 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.

Preferred securities start June on strong footing

U.S. Treasury yields moved higher last week after stronger labor market data. The 10-year Treasury yield ended 11 basis points (bps) higher, with all of the move coming after Friday’s nonfarm payrolls report for May. The data showed a 139,000 net gain in employment last month, with the unemployment rate flat at 4.2%. The strong headline reading was offset somewhat by downward revisions of 92,000 to prior months, but it still beat consensus expectations. Those forecasts were marked down earlier in the week after a private sector gauge of employment growth surprised substantially to the downside, showing only 39,000 jobs gained last month. Additionally, surveys of business sentiment showed a further deterioration. Nevertheless, the official nonfarm payrolls report remains the single best indicator of economic health, and its strength more than offset any weakness from the other datapoints.

Investment grade corporates retreated alongside the increase in rates, returning -0.23% for the week. Nevertheless, spreads tightened 3 bps and the asset class outperformed similar-duration Treasuries by 28 bps. Preferred securities returned 0.44% and beat similar-duration Treasuries by 92 bps, placing them on strong footing to start June. Across investment grade markets, supply was close to expectations, totaling $26 billion. Those deals continued to be well-digested, with average oversubscription rates of 4x and new issue concessions of 1.3 bps. Inflows picked up at $4.9 billion.

High yield corporates notched another weekly gain, returning 0.32% and beating similar-duration Treasuries by 63 bps. Senior loans returned 0.14%. Inflows were especially strong into high yield funds, totaling $1.5 billion, while loan funds saw a more modest inflow of $45 million. Both asset classes had healthy supply, totaling $11.6 billion and $8.7 billion across high yield and senior loans, respectively.

Emerging markets outperformed, returning 0.21% and outpacing similar-duration Treasuries by 68 bps. So far in 2025, emerging markets as an asset class has outperformed Treasuries by 112 bps, making it the best-performing asset class so far this year. Inflows picked up materially, totaling $721 million, while supply was also slightly higher at $8 billion.

Municipal bond supply remains challenging

Municipal bond yields were mixed last week, and the yield curve performed surprisingly well given outsized new issuance. Short-term yields declined -7 bps and long yields finished 4 bps higher. New issue supply was surprisingly well received. Fund flows were positive overall, while exchange-traded fund outflows totaled -$145 million. This week’s new issuance is expected to be the fourth largest ever and should be well received.

Muni market supply and demand remain in equilibrium. The market saw the second largest issuance ever last week at $19 billion. It was absorbed mainly due to the $140 billion of reinvestment money that is beginning to enter the system from June to August. Supply should be challenging again this week, but the reinvestment money should provide support. Also, intermediate tax-exempt bonds yielding 4% and longer bonds at 5% continue to pique institutional and individual investor interest. Look for outsized new issuance to continue through the summer as issuers take advantage of the outsized reinvestment money.

Board of Regents of the University of Texas System issued $692 million revenue bonds (rated Aaa/AAA). Some bonds traded in the secondary market at a premium to where they were issued. For example, 5% coupon bonds due in 2036 were issued at a 3.72% yield and traded in the secondary market at 3.62%.

High yield municipal yields ended the week slightly higher, showing steadiness amid heavier supply. New issue deals were firmly subscribed. Secondary market volumes declined as available cash flow gravitated toward higher absolute yields.

High yield corporates saw especially strong inflows, along with healthy supply.

In focus: The ECB cuts and prepares to pause

As expected, the European Central Bank reduced its benchmark deposit rate by 25 basis points, to 2.00% – its eighth consecutive rate reduction during this easing cycle, which began a year ago.

The ECB’s economic forecasts were little changed from March. Inflation, currently 1.9%, is expected to edge up to 2% by year-end, while annualized GDP growth is anticipated to remain at 0.9%. ECB President Christine Lagarde noted that if trade tensions “were resolved with a benign outcome, growth and, to a lesser extent, inflation, would be higher” (and vice versa). These projections assume a 10% flat tariff from the U.S. and no retaliation by the European Union, and they align with ours.

Lagarde also made clear that “We are not committing to a particular rate path” and “especially in current conditions,” the ECB “will follow a data-driven and meeting-by-meeting approach” to monetary policy. At the same time, she noted the ECB is “in a good position,” suggesting a pause in cutting rates is forthcoming, which is what we expect.

That is because Germany, Europe’s largest economy, is primed to launch a massive stimulus program focusing on defense, infrastructure, cybersecurity and green energy. Remaining patient will allow policymakers to assess the program’s impact. In our view, this shift from decades of fiscal austerity warrants higher yields, a stronger euro and structural support for European assets more broadly through the medium-term.

 

Table of information for U.S. Treasury market, municipal market, yield ratios, and characteristics and returns

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Investment Outlook The Fed emphasizes patience over pre-emption
Rates hold steady, but the next move is still likely to be a rate cut later this year.
Investment Outlook 2025 Q2 outlook: Wheels down, elevation up: Five themes for a new economic landing
While we’ve experienced unanticipated bumps on the final approach to the runway in the form of increased policy uncertainty and market volatility, today’s directional dynamics still point to the same or similar investment themes we saw at the start of the year.

Performance: Bloomberg L.P.

Issuance: The Bond Buyer, 06 Jun 2025.
Fund flows: Lipper.
New deals: Market Insight, MMA Research, , 04 Jun 2025.

Any reference to credit ratings refers to the highest rating given by one of the following national rating agencies: S&P, Moody’s or Fitch. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below-investment grade ratings.

Representative indexes: municipal: Bloomberg Municipal Index; high yield municipal: Bloomberg High Yield Municipal Index; short duration high yield municipal: S&P Short Duration Municipal Yield Index; taxable municipal: Bloomberg Taxable Municipal Bond Index; U.S. aggregate bond: Bloomberg U.S. Aggregate Bond Index; U.S. Treasury: Bloomberg U.S. Treasury Index; U.S. government related: Bloomberg U.S. Government-Related Index; U.S. corporate investment grade: Bloomberg U.S. Corporate Index; U.S. mortgage-backed securities; Bloomberg U.S. Mortgage-Backed Securities Index; U.S. commercial mortgage-backed securities: Bloomberg CMBS ERISA-Eligible Index; U.S. asset-backed securities: Bloomberg Asset-Backed Securities Index; preferred securities: ICE BofA U.S. All Capital Securities Index; high yield 2% issuer capped: Bloomberg High Yield 2% Issuer Capped Index; senior loans: S&P UBS Leveraged Loan Index; CLO AA: J.P. Morgan Collateralized Loan Obligation AA Index; CLO BB: J.P. Morgan Collateralized Loan Obligation BB Index; global emerging markets: Bloomberg Emerging Market USD Aggregate Index; global aggregate: Bloomberg Global Aggregate Unhedged Index.

This material is not intended to be a recommendation or investment advice, does not constitute a solicitation buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals.

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.


Important information on risk
Investing involves risk; principal loss is possible. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, derivatives risk, dollar roll transaction risk and income risk. As interest rates rise, bond prices fall. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Preferred securities are subordinated to bonds and other debt instruments in a company’s capital structure and therefore are subject to greater credit risk. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks may be magnified in emerging markets. Asset-backed and mortgage-backed securities are subject to additional risks such as prepayment risk, liquidity risk, default risk and adverse economic developments. The value of convertible securities may decline in response to such factors as rising interest rates and fluctuations in the market price of the underlying securities. Senior loans are subject to loan settlement risk due to the lack of established settlement standards or remedies for failure to settle. These investments are subject to credit risk and potentially limited liquidity, as well as interest rate risk, currency risk, prepayment and extension risk, and inflation risk. Any investment in collateralized loan obligations or other structured vehicles involves significant risks not associated with more conventional investment alternatives.

Investors should contact a tax advisor regarding the suitability of tax-exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on the state of residence. Income from municipal bonds held by a portfolio could be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.

Nuveen, LLC provides investment solutions through its investment specialists.

This information does not constitute investment research as defined under MiFID.

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