Yields ease as credit markets grind tighter

Key takeaways

• April payrolls beat expectations, but stress beneath the surface pushed Treasury yields modestly lower.
• Credit spreads tightened across the board, with investment grade compressing further and high yield spreads moving inside recent levels.
• Upcoming CPI inflation and retail sales data should help shape the Fed's next move.

Market recap

The April jobs report dominated the week, with payroll growth beating consensus at 115,000 versus 65,000 expected. But the composition was narrow, and the household survey flashed caution as involuntary part-time employment rose sharply. Markets read the mixed data as supportive of eventual easing by the U.S. Federal Reserve, pulling the 10-year Treasury yield down 2 basis points (bps) to 4.36%.

Returns were positive across fixed income. The Bloomberg Aggregate Bond Index returned +0.26%. Investment grade corporates led at +0.38%, emerging markets returned +0.41% and preferreds gained +0.32%. Senior loans advanced +0.25%.

Outlook

The Fed is on hold at 3.50% to 3.75% following April’s hawkish-leaning meeting, where three members dissented against the easing bias language. Chair Powell signaled a higher bar for cuts, and policy stays data-dependent. This week’s CPI will be critical in shaping near-term rate expectations as inflation broadens beyond energy.

Geopolitical uncertainty — including the Iran-U.S. standoff at the Strait of Hormuz — prompted us to recently revise our forecasts. We now expect slightly lower GDP growth and slightly higher core inflation, with the Fed on pause through the summer before a single cut later this year. We continue to forecast the 10-year Treasury yield in a 4.00% to 4.25% range at year end.

Weekly fixed income snapshot

U.S. Treasuries

Yields declined modestly across the curve last week as the April jobs report painted a mixed picture of the labor market. The headline payroll number beat expectations, but the composition was narrow and the household survey revealed meaningful stress beneath the surface — including a sharp rise in involuntary part-time employment. The curve bull-flattened slightly, with the long end outperforming as markets read the data as supportive of eventual Fed easing. The Fed is on hold following its hawkish-leaning meeting the prior week, and current yield levels sit well above their 10- and 20-year historical averages.

The 2-year Treasury yield rose 1 bp to 3.89%, the 5-year fell 1 bp to 4.00%, the 10-year fell 2 bps to 4.36% and the 30-year fell 3 bps to 4.94%.

Tax-exempt municipals

Tax-exempt municipals shrugged off Treasury volatility to post a solid gain. Investors poured $1.85 billion into municipal funds and exchange-traded funds — the largest weekly inflow since February — as buyers moved to lock in yields. Demand was particularly strong in high yield munis, where funds took in $560 million. Issuers brought over $13 billion in new deals, with long-dated and high yield names finding strong demand and repricing meaningfully tighter. Favorable technicals in May and June, paired with attractive yield levels, should keep the sector a compelling destination for cash deployment.

The Bloomberg Municipal Index returned +0.20%.

Taxable municipals

Taxable municipals gained on the week, lifted by falling Treasury yields and steady crossover demand. The sector’s longer duration profile amplified the benefit from the rate move, and firm credit markets added to the tailwind. Year-to-date performance is solid, and the yield advantage over comparably rated corporates keeps drawing interest.

The Bloomberg Municipal Taxable Index returned +0.34% with spreads at 54 bps.

Investment grade corporates

Investment grade corporates outperformed as spread tightening and falling rates drove strong returns. Fund inflows held at +$7 billion, and new issuance was well-absorbed despite a heavy calendar, with deals pricing at minimal concessions. Investor appetite for high-quality credit at all-in yields above 5% is proving durable. Healthy balance sheets and constructive earnings underpin fundamentals, and spreads now sit well inside their 10- and 20-year averages.

The Bloomberg U.S. Corporate Bond Index returned +0.38% with spreads at 77 bps.

U.S. high yield corporates

High yield posted a modest gain, supported by strong risk sentiment and robust demand for income. Primary supply is manageable relative to investor appetite, defaults are well-contained and earnings have broadly supported credit quality across the ratings spectrum. The sector’s short duration profile appeals to investors seeking yield without significant rate exposure.

The Bloomberg High Yield 2% Issuer Capped Index returned +0.05% with spreads at 266 bps.

Preferred securities

Preferred securities posted a solid gain, lifted by falling rates and continued spread compression. Coupon income kept income-oriented buyers engaged, supply was manageable and both retail and institutional interest in the sector held firm.

The ICE BofA U.S. All Capital Securities Index returned +0.32% with spreads at 155 bps.

Senior loans

Senior loans delivered positive returns, with their floating-rate structure and near-zero rate sensitivity again proving attractive to investors seeking high current income with minimal duration risk. The default environment remains benign and spreads tightened as sentiment improved.

The S&P Leveraged Loan Index returned +0.25% with spreads at 480 bps.

Securitized credit

Securitized sectors posted positive returns with spreads broadly stable across MBS, CMBS and ABS.

Agency MBS led the way, buoyed by falling rates and steady demand from banks and money managers. CMBS drew support from improving sentiment around commercial real estate fundamentals, though the office sector remains under scrutiny. ABS delivered their typical defensive carry, with spreads near long-term averages.

Relatively short duration, structural protections and consistent demand have made the securitized complex one of the steadier risk-adjusted performers year-to-date.

The Bloomberg U.S. Mortgage-Backed Securities Index returned +0.30% with spreads at 19 bps. The Bloomberg CMBS ERISA-Eligible Index returned +0.18% with spreads at 66 bps. The Bloomberg Asset-Backed Securities Index returned +0.14% with spreads at 48 bps.

Global emerging markets

Emerging markets debt posted a strong week as spread tightening and attractive yields more than offset residual rate volatility. Higher-quality sovereigns attracted the bulk of flows, and geopolitical developments — including signals of potential diplomatic progress on the Iran-U.S. standoff — gave sentiment a modest lift. Steady inflows and manageable new issuance kept supply-demand dynamics favorable.

The Bloomberg Global Aggregate Unhedged Index returned +0.41% with spreads at 168 bps.

U.S. Treasury market yields

Fixed income characteristics and returns