Bond markets rise despite geopolitical tensions

Weekly fixed income update highlights

• Treasuries, investment grade and high yield corporates, MBS, preferreds, senior loans and emerging markets all gained.
• Municipal bond yields ended the week lower. New issue supply was $17.5B, and fund inflows were $523M. This week’s new issuance is light at $6.9B.

U.S. Treasury yields declined last week, pulling other fixed income sectors higher, as moderating U.S. core inflation data and strong technical demand offset concerns about rising oil prices.

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Watchlist

• Treasury yields moved lower, and we continue to expect elevated volatility, a wider trading band and a modest rally from current levels.
• Spread sectors benefited from the move lower in rates but generally underperformed Treasuries.
• 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.

Investment grade corporate inflows slow

U.S. Treasury yields declined last week, with the 10-year yield falling -11 basis points (bps) to 4.40% and the 2-year dropping -9 bps. The rally was primarily driven by encouraging inflation data, as May’s core consumer prices showed continued moderation. Notable improvements included shelter costs returning to pre-pandemic levels and stable core goods prices, despite potential upward pressure from upcoming tariffs. The 0.1% increase in core prices brought the three-month annualized rate down to 1.7%, while the year-over-year rate held steady at 2.8%. However, geopolitical tensions between Israel and Iran sparked a 13% surge in WTI crude oil prices on Friday, pushing inflation expectations and interest rates higher. Markets found additional support from robust demand at the Treasury’s 10- and 30-year bond auctions, alleviating concerns about deficit financing amid ongoing Congressional fiscal discussions.

Investment grade corporates gained, returning 0.66% for the week, though the asset class slightly underperformed similar-duration Treasuries by -2 bps. Spreads were flat overall. Inflows slowed, with only $2.7 billion entering the market, around $2 billion less than in recent weeks. However, new issuance was also lighter than expected, with just under $22 billion pricing. Those deals continued the recent theme of a very robust investor appetite, with oversubscription rates of 5x on average and new issue concessions of just 1.4 bps.

High yield corporates advanced again, returning 0.15%, though they lagged similar-duration Treasuries by -22 bps. Senior loans returned 0.01%. Spreads in both asset classes widened, by 8 bps in high yield and 5 bps in loans. Nevertheless, both asset classes continued to experience healthy inflows, totaling $1.1 billion and $354 million across high yield and loans, respectively. New issuance was steady as well, totaling $2.6 billion in high yield and $14.2 billion in loans.

Emerging markets also gained, returning 0.46%. However, similar to U.S. markets, spreads generally widened, and the asset class underperformed similarduration Treasuries by 16 bps. Spreads widened across investment grade and high yield, though higher oil prices will likely support certain countries that are large oil exporters. Technicals remained supportive, with inflows totaling $738 million. New issuance was slightly slow, totaling $2.2 billion.

Muni bond supply/demand balance remains favorable

Municipal bond yields moved lower last week, with short-term maturities declining -4 bps and longer-dated bonds falling -2 bps. Despite elevated new issuance, the market demonstrated continued strength. It was supported by the seventh consecutive week of positive fund flows, including $329 million into exchange-traded funds.

The market’s supply/demand dynamics remain balanced, bolstered by substantial reinvestment capital of approximately $140 billion available through 01 August. While recent weeks saw significant new issue volume successfully absorbed, this week’s calendar is notably lighter due to Wednesday’s U.S. Federal Reserve meeting and Thursday’s market closure for the U.S. Juneteenth holiday.

The municipal market continues to exhibit resilience, as the substantial recent supply has been met with steady demand. The lighter calendar ahead should provide an opportunity for dealers to clean up remaining positions.

The state of Maryland issued four competitive deals totaling over $1.5 billion (rated Aa1/AAA). Though these offerings saw general market acceptance, some unsold balances persist. Dealers maintain an optimistic outlook for placing remaining inventory, particularly given this week’s reduced supply.

High yield municipal bonds strengthened last week, with yields declining -4 bps to 5.84% on average. While fund inflows moderated to $138 million, they remained positive. Looking ahead, the light new issue calendar and improving technical factors suggest further market tightening in the coming weeks.

Robust investor demand and a $140 billion reinvestment cushion absorb heavy muni bond supply.

In focus: Muni bonds offer fresh opportunities

The municipal bond market has experienced continued yield curve steepening in 2025, creating attractive entry points for investors. While shorter-term yields have slightly declined, longer-dated maturities (8+ years) have seen proportional yield increases, presenting strategic opportunities in the current market environment.

Despite higher long-term yields, municipal fundamentals remain strong, with growing tax collections and improved financial positions compared to pre-pandemic levels. The yield increases are primarily attributed to technical factors, including record-breaking issuance (up +12% yearover-year) and seasonally low demand from reinvestment flows and April tax-related selling. However, demand is expected to strengthen as summer approaches, driven by attractive yield levels and increased reinvestment flows.

This market dynamic creates compelling opportunities for investors looking to deploy cash or shift from taxable alternatives. Municipal yield ratios versus Treasuries are elevated, indicating relative value, while investment grade absolute yields are at the 97th percentile compared to 10-year trailing averages.* The steep, positive yield curve structure offers additional compensation for extending duration, making it an opportune time for investors to consider putting cash to work in the municipal market.