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Weekly fixed income update highlights
- Treasuries, investment grade corporates, taxable munis, MBS, preferreds and emerging markets retreated.
- Senior loans and high yield corporates gained.
- Municipal bond yields remained unchanged once again. New issue supply was $16.6B, and fund inflows were $736M. This week's new issuance is $10.6B.
U.S. Treasury yields rose and the curve steepened last week ahead of this week's U.S. Federal Reserve meeting. Credit generally outperformed across sectors while municipals remained stable.
Watchlist
- 10-year Treasury yields rebounded last week and remain close to our year-end forecast.
- Spread sectors generally outperformed similar-duration Treasuries amid stronger U.S. labor market 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.
Investment grade corporate supply exceeds annual forecast
U.S. Treasury yields rose last week, with 10-year yields climbing 12 basis points (bps) to 4.14%. 2-year yields rose only 7 bps, steepening the curve to within 8 bps of its steepest level since 2022. U.S. economic data improved as jobless claims dropped sharply, signaling a stronger labor market. Still, we expect the Fed to cut rates this week after the latest payrolls report showed a concerning uptick in unemployment. Separately, hawkish commentary from Bank of Japan Governor Ueda - who suggested a likely rate hike later this month - pressured global yields higher.
Investment grade corporates returned -0.47% amid the Treasury selloff but beat similar-duration Treasuries by 27 bps as spreads tightened. Inflows accelerated to $6.1 billion. Supply came in as expected at $30 billion and has already exceeded the full-year estimate of around $1.5 trillion. The market has absorbed it well. New issuance averaged 4.8x oversubscribed with 1.8 bps in concessions.
High yield corporates returned 0.12%, outperforming similar-duration Treasuries by 33 bps. Senior loans returned 0.27%, their best weekly performance since July. High yield funds saw $1.2 billion in inflows, while loan funds posted -$182 million in outflows. Supply totaled $4 billion in high yield bonds and $5.8 billion in senior loans.
Emerging markets returned -0.04% but beat similar-duration Treasuries by 60 bps as spreads tightened - sovereigns by 14 bps and corporates by 6 bps. Inflows accelerated to $1.7 billion, while supply softened to $5.5 billion with 3.4x average oversubscription.
Muni bond yields remain unchanged amid robust demand
The muni yield curve was largely unchanged last week, with short-term yields falling 1 bp and long-term yields rising 5 bps. New issue supply was well received, and fund flows remained positive, including $15 million flowing into exchange-traded funds. This week's expected supply should be well absorbed.
The municipal market maintains a solid tone driven by a strong Treasury market and sustained demand. More than $42 billion in reinvestment cash has reentered the market since 01 December. Both individual and institutional investors remain active buyers. New issue supply should stay muted through year-end amid U.S. holidays, keeping the market well bid.
The City of San Antonio, Texas, issued $603 million in electric and gas system revenue bonds (rated Aa2/AA-) to strong demand. Maximum yield bonds - 5% coupons due 2041 - were initially priced at 3.78% but repriced tighter to 3.72% at final pricing.
High yield municipal bond yields rose just 3 bps on average last week, but ended the week on firmer footing. While the market absorbed nearly 30 new deals last week, this week brings below-average new issue supply. Fund flows have turned choppy due to tax-loss harvesting but remain net positive, with inflows of approximately $250 million last week. The Puerto Rico Electric Power Authority (PREPA) has seen improved bids despite heavy new issue activity.
More than $42 billion in reinvestment cash has reentered the market since 01 December.
In focus: Muni market dynamics create opportunities
The municipal bond market has reached a turning point, in our view. After munis' prolonged underperformance in 2025, multiple favorable dynamics are converging to create compelling opportunities for disciplined investors.
Federal Reserve rate cuts have accelerated municipal flows, as approximately $7.5 trillion in sidelined cash moves into higher-yielding fixed income assets. Municipal bonds should be well-positioned to capture these flows, offering high-quality investments with yields near decade highs.
Supply should remain elevated at $600 billion, creating ample investment opportunities. Principal redemptions and coupon payments are expected to surge 50%, generating powerful reinvestment flows.
The municipal yield curve has steepened — 20-year bonds offer 1.46% and 1.12% higher yields than 5- and 10-year bonds, respectively. This may reward investors who extend to longer maturities.
Federal policy shifts may create headwinds for specific sectors - hospitals, higher education and certain state budgets. However, municipal borrowers enter 2026 with record reserves and resilient revenue streams. State and local governments, water/sewer utilities and electric utilities demonstrate proven resilience.
Disciplined credit selection and active management may unlock compelling tax-advantaged, risk-adjusted returns as technical and fundamental tailwinds reinforce one another.
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Performance: Bloomberg L.P.
Issuance: J.P. Morgan, 05 Dec 2025.
Fund flows: Lipper.
New deals: Market Insight, MMA Research, 03 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.
