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Weekly fixed income update highlights
- Treasuries, investment grade and high yield corporates, preferreds, taxable munis, MBS, emerging markets and senior loans all advanced.
- Municipal bond yields were essentially unchanged once again. New issue supply was $9.2B, and fund inflows were $400M. This week brings no new issuance of note.
Fixed income markets posted modest gains last week despite thin holiday liquidity. Emerging markets led performance for the year, while munis remained well supported heading into 2026. U.S. data releases showed shutdown-related distortions across employment and inflation figures.
Watchlist
- 10-year Treasury yields decreased again last week and remain close to our year-end forecast.
- Spread sectors generally outperformed versus similar-duration Treasuries amid mostly steady economic data.
- We expect the technical environment for municipal bonds to continue improving in 2026.
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.
Emerging markets lead fixed income with outperformance
U.S. Treasury yields fell last week, with the 10-year ending 4 basis points (bps) lower at 4.15%. Despite thin year-end liquidity, several central banks moved: The European Central Bank held steady, the Bank of England cut 25 bps and the Bank of Japan hiked 25 bps. Two months of catch-up U.S. jobs and inflation data were released after being delayed by the federal shutdown. Labor markets appeared slightly weaker (unemployment rising to 4.6%) and inflation softer (core up 2.6% year-over-year), though shutdown effects likely distorted both the actual data and collection methods. We estimate unemployment is overstated by roughly 0.1 percentage point and inflation understated by at least 0.1 percentage point. After adjusting for these distortions, the data align with our prior forecasts.
Investment grade corporates returned 0.28% for the week, lagging similar-duration Treasuries by 4 bps. The asset class is on track to finish 2025 up 7.5%, beating similar-duration Treasuries by 108 bps. Preferreds returned 0.24% and are tracking toward a 6.6% annual return, outperforming Treasuries by 38 bps. Investment grade corporate supply was light, with only one $1 billion deal pricing - oversubscribed 5x. Full-year 2025 supply reached just under $1.6 trillion, up 6.7% from 2024.
High yield corporates returned 0.22%, outperforming similar-duration Treasuries by 2 bps. Senior loans returned 0.05%. Both are on track for strong 2025 returns: 8.2% for high yield bonds and 5.7% for senior loans. Supply remained light at $1.9 billion in high yield, while inflows totaled a healthy $800 million.
Emerging markets outperformed again, returning 0.32% and beating similar-duration Treasuries by 2 bps. For 2025, EM is up 10.9% and has outperformed Treasuries by 454 bps - the strongest showing across major fixed income asset classes. Supportive fundamentals, the dollar's biggest annual decline since 2017 and improved technicals drove performance. With another $1.5 billion flowing into EM funds last week, full-year inflows reached $28.8 billion.
The muni market remains well bid due to strong demand
The muni yield curve ended the week essentially flat. Short-term yields fell 2 bps while the rest of the curve held steady. Light new issuance was well received, including $644 million flowing into exchange-traded funds. While this week has no notable new issuance, 2025 total supply reached $575 billion - 13% higher than 2024.
The muni market remains well bid due to strong Treasury performance and favorable muni supply/demand dynamics. New issuance has ended for the year, but dealers expect approximately $50 billion in reinvestment flows on 01 January. Thus, we think munis should remain well bid through mid-January. Looking ahead, most firms project 2026 new issuance around $600 billion, which could create buying opportunities.
New York City Transitional Finance Authority issued $1.8 billion in tax-secured subordinated revenue bonds (rated Aa1/AAA). Strong demand prompted underwriters to lower yields across the board at final pricing.
High yield municipal bond funds continue absorbing moderate tax-loss selling that is dampening demand. New issues remained well subscribed. The week's standout deal, a storm-resistant and energy-efficient hotel development in the U.S. Virgin Islands, tightened 12.5 bps after final pricing. Buckeye Tobacco has attracted buyers at current yields after severe underperformance, though tobacco bonds have clearly fallen out of market favor.
EM is up 10.9% for 2025 and has outperformed Treasuries by 454 bps - the strongest showing across major fixed income asset classes.
In focus: The ECB pauses and reflects
The European Central Bank kept its policy rate at 2.0%, a move widely anticipated by markets, while reconfirming the likely end of its easing cycle.
In its policy statement, the ECB offered few additional insights compared to prior versions, repeating that policymakers are "not committed to a particular rate path." During her post-meeting press conference, ECB President Christine Lagarde noted that the outlook for inflation "continues to be more uncertain than usual on account of the still-volatile international environment."
In its latest macroeconomic projections, the ECB expects headline inflation to edge "somewhat" below 2% in 2026-2027 before hitting its medium-term target (2%) in 2028. Core inflation (less food and energy costs) should fall as wage pressures and services inflation moderate. As for GDP, the ECB noted that the eurozone economy "is proving to be more resilient than expected." With that in mind, policymakers expect GDP growth of 1.2% next year and 1.4% in 2027-2028 amid rising household incomes and government spending.
Looking ahead, we anticipate one 25 bps rate hike by the ECB in 2026. Most developed markets central banks are at or near the end of their easing cycles. For European fixed income, we prefer spread products (such as investment grade bonds) versus duration and overweights in debt issued by select peripheral countries.
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Performance: Bloomberg L.P.
Issuance: J.P. Morgan, 19 Dec 2025.
Fund flows: Lipper.
New deals: Market Insight, MMA Research, 17 Dec 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.
