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Weekly Fixed Income Commentary

Treasury yields do the twist amid tariff uncertainty

Anders Persson
Chief Investment Officer, Head of Global Fixed Income
Daniel J. Close
Head of Municipals
Fire in the sky over black mountains

Weekly fixed income update highlights

U.S. Treasury yields “twist flattened” amid mixed economic data and tariff-driven uncertainty. Tariff measures should be inflationary in the near term, while dragging on growth longer term.

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Watchlist

  • 10-year Treasury yields declined last week, and we expect yields to remain rangebound during 2025.
  • Spread sectors generally underperformed Treasuries, and spreads remain tight.
  • We expect the technical environment for muncipal bonds to remain strong this year.

Investment views

Rates are set to stay higher for longer, as the Fed approaches the end of the cutting cycle.

The underlying growth outlook remains healthy thanks to strong consumer balance sheets and solid levels of business investment. This combination should keep corporate defaults low.

Risk premiums may widen further, with entry points for taxable fixed income likely to become more attractive over the coming quarters. Credit selection remains key as we search for bonds with favorable income and solid fundamentals.

Key risks

  • Inflation fails to continue moderating as expected, weighing on asset prices.
  • Policymakers unsuccessfully juggle fighting inflation with supporting economies still struggling to gain traction.
  • Geopolitical flare-ups intensify around the world.

Investment grade corporates experience active supply

U.S. Treasury yields were mixed last week, with 10-year yields dropping -4 basis points (bps) to 4.50% and 2-year yields rising 9 bps to 4.29%. Longer-maturity yields were pressured lower by softer economic data and tariff uncertainty early in the week, while the front-end was less affected. Tariff measures should be inflationary in the near term, while dragging on growth longer term. This results in the “twist” flattening dynamic, where front-end yields move higher and long-end yields move lower. Economic data were mixed, with surveys of business activity weakening. However, Friday’s jobs report beat expectations, with the unemployment rate declining to 4.0%. The market is currently pricing around 36 bps of U.S. Federal Reserve rate cuts this year.

Investment grade corporates continued to rally, returning 0.37% for the week, though the asset class lagged similar-duration Treasuries by 23 bps. Spreads on the index widened 3-5 bps early in the week amid the tariff uncertainty, but partially retraced once it became clear that the more extreme measures would be delayed. Inflows were strong, totaling $7.9 billion. Supply was more active than expected, with almost $41 billion pricing. The robust primary calendar continues to be well digested, with oversubscription rates of 4x and new issue concessions of 2.4 bps. So far in 2025, supply is running 2.3% above 2024’s strong pace.

High yield corporates weakened slightly, returning -0.01% and underperforming similar-duration Treasuries by 7 bps. Senior loans also retreated -0.01%. Both asset classes experienced inflows, totaling $834 million for high yield and a record-setting $2.9 billion into loan funds. Recent earnings reports have been solid, though forward-looking guidance from companies has been more mixed, given macroeconomic, policy and tariff uncertainty. Meanwhile, the new issue calendar picked up, with $9.2 billion and $17.6 billion pricing in high yield and loans, respectively.

Emerging markets gained again, returning 0.39%, though the asset class also lagged similar-duration Treasuries by 9 bps. Outflows resumed, with -$421 million exiting emerging markets funds. New issue activity was healthy, with slightly more than $20 billion pricing, skewed toward investment grade issuers. Those deals were 3.5x oversubscribed overall, as demand remains strong despite macro uncertainty.

The municipal bond market should remain well bid

The entire municipal bond yield curve declined last week. The 2-year yield ended -7 bps lower and the long end declined -4 bps. The new issue calendar was robust and well received. Fund flows were positive overall, despite -$16 million in exchange-traded fund outflows. This week’s outsized new issue supply may challenge the market somewhat.

The municipal market has had a good tone. Munis continue to draft off a solid Treasury bond market, in addition to $44 billion of reinvestment money that came into the market on 01 February. Even though most of this money has been spent, the market should remain well bid if Treasuries remain strong.

The Lower Colorado River Authority (Texas) issued $520 million transmission revenue bonds. (rated A1/AA). The deal was well received, and some bonds traded at a premium in the secondary market. For example, 5% coupon bonds due in 2044 came at a 4.04% yield and traded in the secondary market at 3.99%.

High yield municipal bond inflows totaled $330 million last week, similar to the prior week. High yield fund flows are nearly $2 billion year-to-date, representing half of all muni flows. Strong demand and light new issue supply will likely keep firm downward pressure on high yield muni credit spreads. We are tracking just nine new issue deals this week totaling $281 million.

This week’s outsized municipal new issue supply may challenge the market.


In focus: Spotlight on global fixed income impact

The third edition of our Global Fixed Income Impact Report highlights many positive social and environmental outcomes funded by our client portfolios in 2023. This comprehensive report provides clear insights into how public markets are driving meaningful change at scale.

The four case studies feature deal specifics, Nuveen’s engagement and the outcomes supported by the bonds.

The new “Data deep dive” section focuses on global trends as well as insights into our commercial mortgage-backed securities holdings across the U.S., homing in on Leadership in Energy and Environmental Design (LEED) Platinum and Gold certified buildings. (LEED is the most widely used green building rating system.)

Nuveen’s nearly $9 billion (31 Dec 2023) of impact investments across six continents and 52 countries details our global reach.

Broadly, our impact framework intentionally invests across four themes: (1) affordable housing, (2) community and economic development, (3) renewable energy and climate change and (4) natural resources. Within these themes, Nuveen targets clearly defined impact outcomes and eligible project types. Through the framework, we articulate how these investments work toward to positive outcomes for stakeholders.

 

Table of information for U.S. Treasury market, municipal market, yield ratios, and characteristics and returns
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Impact strategies may have a varying mix of impact, ESG leaders and traditional securities. Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well.

Performance: Bloomberg L.P.
Issuance: The Bond Buyer, 07 Feb 2025.
Fund flows: Lipper.
New deals: Market Insight, MMA Research, 05 Feb 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; 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.

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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