Treasury yields fall as the Fed leans more dovish

Weekly fixed income update highlights

• Treasuries, investment grade and high yield corporates, MBS, preferreds, senior loans and emerging markets all gained.
• Municipal bond yields declined. New issue supply was $12.5B, and fund inflows were $77M. This week’s new issuance is muted at $2.1B.

U.S. Treasury yields fell amid softer U.S. economic data and more dovish rhetoric from certain U.S. Federal Reserve officials. Markets have fully priced in a September rate cut, while proposed tariff impacts appear already reflected in prices. However, the yield curve remains steep as investors question whether the final version of the fiscal bill will contain sufficient measures to control long-term inflation.

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 broadly outperformed Treasuries, with lower-rated segments showing particular strength.
• 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 pick up substantially

U.S. Treasury yields declined again last week, with 10-year yields ending -10 basis points (bps) lower at 4.28%. The move was driven by more dovish rhetoric from Federal Reserve officials and softer economic data. The 2-year Treasury yield fell -16 bps for the week to 3.75%, its lowest level since early April. Fed Chair Powell repeated his recent comments in testimony to Congress, suggesting that it is still appropriate for the Fed to remain patient before cutting rates further. But other officials, notably including Governors Waller and Bowman, suggested that a cut at the 30 July meeting could be appropriate. Separately, U.S. economic data were generally softer, including a downward revision to Q1 GDP growth to -0.5% annualized, further slowdowns in home sales, an uptick in jobless claims and the first monthly decline in consumer income since 2021.

Investment grade corporates advanced, returning 0.67% for the week, though the asset class lagged similar-duration Treasuries by -2 bps. Spreads were flat at 85 bps, remaining in their recent range far below the April peak near 120 bps but above this year’s lows of 77 bps. Inflows picked up substantially, more than doubling last week to $5.3 billion, the largest weekly inflow in more than a month. Heavy supply saw just over $36 billion pricing, though deals continued to be extremely well-digested. This week is expected to be quieter with the Independence Day holiday in the U.S. Supply is running 4.5% ahead of last year’s pace year-to-date.

High yield corporates also rallied, returning 0.81% and outperforming similar-duration Treasuries by 37 bps. Lower-rated segments continued their recent trend of outperformance, with CCC rated corporates gaining 1.02%. Senior loans advanced 0.38%, their 12th straight weekly gain. Both asset classes saw inflows, totaling $3.5 billion into high yield and $306 million into loans. As in investment grade corporate markets, supply was elevated, with $9.1 billion and $21.5 billion pricing across high yield and loans, respectively.

Emerging markets rebounded, gaining 0.85% and beating similar-duration Treasuries by 21 bps. As in U.S. corporate markets, lower-rated names outperformed. In the sovereign space, high yield spreads tightened -5 bps, while investment grade names widened 6 bps. The emerging markets asset class had a robust inflow of $1.5 billion entering the market. At the same time, supply accelerated dramatically at $26 billion.

Summer reinvestment bolsters the municipal market

Municipal bond yields ended last week lower, with short-term maturities dropping -4 bps while long-end yields held steady. New issuance was well received, and fund flows remained positive for the ninth consecutive week, including $467 million in exchangetraded inflows. New issuance is expected to be muted this week due to the 04 July holiday in the U.S.

The muni market is well positioned, to remain supported through summer. Year-to-date new issue supply has reached $280 billion, 33% above the 10- year historical first-half average. Despite rising yields, the market has efficiently absorbed this substantial supply. Reinvestment flows of $45 billion are scheduled for both 01 July and 01 August, providing additional support. Municipal bonds continue to offer attractive tax-exempt yields, with intermediate and long bonds yielding 4% and 5% respectively.

Seattle, Washington, issued $443 million light and power revenue bonds (rated Aa2/AA). The deal was well received, and bonds traded at a premium in the secondary market. For example, 5.25% coupon bonds maturing in 2055 came at a yield of 4.80% and subsequently traded at 4.74%.

The high yield municipal market currently presents attractive absolute yields, averaging 5.85% yield-to-worst across the index. We anticipate a significant decrease in new issuance activity in the near term. Additionally, we expect on-the-run high yield munis to begin outperforming after their notable underperformance in recent weeks.

Muni bond new issue supply has reached $280 billion year-to-date, 33% above the 10-year historical first-half average.

In focus: The GIC lays out the fixed income landscape

In its 2025 midyear outlook, Nuveen’s Global Investment Committee (GIC), which brings together the most senior investors across our core and specialist capabilities, highlighted some of its best bond ideas.

Although bonds have seen increased volatility amid rising policy uncertainty, high yields overall offer compelling entry points, and the fundamental credit picture remains positive. Regarding duration, the GIC believes long-term rates should gradually drop as U.S. economic growth slows and the Federal Reserve eases policy.

Among the committee’s best sector ideas:

Preferred securities benefit from a strong issuer base (banks are well capitalized) and are attractively valued.

Securitized assets, especially mortgagerelated sectors, offer healthy yields, while high yield corporates, despite tighter spreads, sport positive fundamentals.

Municipal bonds remain one of the GIC’s most-favored areas of the market, with their prices reflecting a dislocation from fundamentals. Lagging year-to-date returns suggest munis offer excellent value.

Senior loans are still a good choice, according to the GIC, but the likelihood of slowly moderating rates warrants caution due to their floating-rate structure.

In contrast, the GIC is less positive on investment grade corporates given their relatively tight spreads and longer duration profile.