Credit spreads tighten as Treasury yields fall

Weekly fixed income update highlights

• All major fixed income segments rallied, including Treasuries, investment grade and high yield corporates, MBS, preferreds, senior loans and emerging markets.
• Municipal bond yields were mixed. New issue supply was $9.8B, and fund inflows were $678M. This week’s new issuance spikes to $13.7B.

U.S. Treasury yields fell last week, fueling widespread gains across fixed income markets. Credit sectors outperformed, particularly investment grade corporates. Municipal bonds showed continued strength despite elevated supply, reflecting robust underlying demand.

Watchlist

• 10-year Treasury yields fell last week, though we expect minimal further declines from here.
• Spread sectors broadly outperformed similar-duration Treasuries despite credit concerns triggered by recent high-profile bankruptcies.
• 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 advance broadly despite credit concerns

U.S. Treasury yields declined last week, with 10- year yields ending 2 basis points (bps) lower at 4.01%. 2-year yields fell more sharply, dropping 4 basis points to 3.46%. Bank earnings dominated market attention. The largest U.S. banks reported healthy quarters. Outside of banking, investors are closely monitoring potential credit risks, particularly after bankruptcies were announced by First Brands and Tricolor. The economic data calendar remained limited due to the government shutdown, though the Bureau of Labor Statistics plans to release the September CPI inflation report this Friday.

Investment grade corporates rallied again, returning 0.53% for the week and outperforming similar-duration Treasuries by 13 bps. Index yields touched 4.69% on Thursday, their lowest level of the year. Inflows decelerated again, with $5.6 billion entering the market. Meanwhile, supply was healthy at almost $25 billion. Demand for new issuance remains robust, with deals averaging oversubscription rates of 3x and concessions of just 1 bps.

High yield corporates also gained, returning 0.47% and beating similar-duration Treasuries by 23 bps. Senior loans returned 0.16%. In both markets, higher-rated BB and B rated segments outperformed versus riskier CCC rated segments. Both asset classes experienced outflows of -$1.3 billion, and supply was very light with only $3.9 billion and $3.2 billion pricing in high yield and senior loans, respectively.

Emerging markets rebounded, returning 0.42% and outperforming similar-duration Treasuries by 5 bps. The decline in U.S. rates helped the dollar to weaken -0.55%, providing a tailwind to the asset class. New issuance activity was muted, with many issuers and investors attending the annual IMF/World Bank meetings in Washington, D.C. Supply totaled just $1.5 billion. Separately, the asset class experienced outflows of -$190 million, a deceleration.

Municipal market remains well bid despite heavy supply

The municipal bond yield curve flattened last week, with short-term yields rising 1 bps while long-term yields declined 4 bps. New issuance was well received, and fund flows remained positive, including $807 million flowing into exchange-traded funds. New issue supply is expected to increase significantly this week and should continue to see strong reception.

The municipal bond market remains well bid, supported by two key factors. First, the government bond market has remained stable. Second, demand for municipal bonds continues to be robust, driven by substantial positive inflows into municipal bond funds over recent weeks.

This week’s new issue calendar is outsized, but should be well received. Many market participants expect new issuance to decline as we approach year end, prompting investors to take advantage of elevated supply levels to deploy available cash. The muni market should maintain its strong bid tone near term.

The City of Chicago successfully issued $423 million in revenue bonds for Midway Airport (rated NR/A). The offering was oversubscribed multiple times, allowing underwriters to lower yields at final pricing.

The average yield of the high yield municipal bond index decreased by 5 bps as demand strengthened, despite slower weekly net flows. New issuance was heavily oversubscribed. For example, a $95 million non-rated student housing deal for Clark- Atlanta traded 50 bps tighter in secondary markets, demonstrating potential for further credit spread compression across the asset class. This week, Nuveen is monitoring at least 13 new high yield muni deals. The Chicago Board of Education announced a solicitation to tender bonds labeled as “crisis debt,” contingent on a sizable and successful refunding deal that will test market support for their longer-term creditworthiness.

Investors are using current outsized muni bond new issuance to deploy cash before year-end supply decline.

In focus: Home is where the heat is

Indonesia lies on the Pacific Ocean’s “Ring of Fire,” where shifting tectonic plates have formed its 17,000 islands and more than 100 active volcanoes. This unique geography positions the country to harness geothermal power – and heat – to generate clean energy.

Despite this vast potential, coal dominates Indonesia’s energy mix. The country’s rising population, as well as its developing manufacturing sector and electrification, have driven energy demand and deepened reliance on fossil fuels for power generation.

The path forward is clear: Funding and scaling geothermal generation can accelerate Indonesia’s goals of improving energy security and creating jobs. And the opportunity is significant – Indonesia currently uses only about 10% of its geothermal capacity, while economic and environmental risks of coal dependency continue mounting.

To support expansion of geothermal electricity generation, Nuveen purchased two green bonds issued by Star Energy Geothermal, Indonesia’s largest geothermal energy producer. Bond proceeds fund operations at three geothermal plants that in 2024 generated enough electricity to power nearly 4.6 million Indonesian households for one year. That production – and related CO2 displacement – is equivalent to removing 1.4 million cars from the road for one year. Both bonds have participated in the 2024-25 emerging markets debt rally, offering yields in the 5.5%-6% range.