Fixed income markets digest heavy issuance

Weekly fixed income update highlights

• Treasuries, mortgages, municipals, investment grade and high yield corporates, preferreds, senior loans and emerging markets all had positive total returns.
• Municipal bond yields declined. New issue supply was $6B, and fund inflows were $1.5B. This week's new issuance is $10.9B.

U.S. Treasury yields were mixed last week as the curve flattened, while municipal and corporate credit markets advanced despite heavy issuance. Strong investor demand absorbed substantial supply across munis, investment grade and high yield. Emerging markets lagged amid fund outflows.

Watchlist

• 10-year Treasury yields decreased again last week, and we anticipate range-bound trading in the near-term.
• Spread sectors generally outperformed versus similar-duration Treasuries amid positive economic data.
• We believe 2026 presents favorable market dynamics for municipal bonds.

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 issuance hits a multi-year high

U.S. Treasury yields were mixed last week, with the curve flattening. 10-year yields ended -3 basis points (bps) lower at 4.17%, while 2-year yields increased 6 bps. The December nonfarm payrolls report was healthy overall, with the unemployment rate declining to 4.4% from 4.6%. That was the biggest one-month drop of the cycle, though much of the improvement was due to the fading of government shutdown-driven distortions. Headline job creation was softer, at 50,000 net jobs added. This week, December CPI data will be released, which is expected to show a slight acceleration in core inflation to 2.7% year-over-year.

Investment grade corporates advanced to start the year, returning 0.34% for the week and beating similar-duration Treasuries by 9 bps. The new issue market was extremely active, with $88 billion pricing, the most since 2020. Despite the glut of supply, demand remained robust. New deals averaged oversubscription rates of 4x and resulted in average new issue concessions of 2 bps. That compares with slightly more than 3 bps average concessions in 2025. Inflows were robust as well, totaling $6.9 billion.

High yield corporates also gained, returning 0.39% and outperforming similar-duration Treasuries by 37 bps. Senior loans returned 0.24%. Both asset classes experienced healthy supply, with $9.7 billion pricing in high yield and $7.1 billion in loans. As in investment grade markets, demand was strong enough to offset any potential headwinds from supply. Inflows totaled $278 million and $514 million in high yield and senior loan funds, respectively.

Emerging markets (EM) lagged after leading fixed income markets in 2025. The asset class returned 0.03% for the week and underperformed similar-duration Treasuries by -17 bps. As in other markets, the primary market dominated attention, with almost $66 billion pricing - more than in November and December combined. Though those deals met healthy demand, averaging oversubscription rates of 3.5x, emerging markets funds faced outflows totaling -$616 million, which weighed on performance.

Municipal bond yields fall as the January effect drives demand

Municipal bond yields declined last week, with short- and long-term yields falling -12 bps and -4 bps, respectively. New issue supply was well received, and long-term funds recorded $417 million in exchange-traded fund inflows. This week's increased new issue calendar should be readily absorbed.

Munis are outperforming Treasuries, partly due to the January Effect, when reinvestment dollars typically exceed new supply. Currently, $42 billion in reinvestment funds are seeking deployment against a manageable new issue calendar. While munis should remain well bid, this strength will likely moderate as new issue volume builds. Supply for 2026 is expected to reach a record $600 billion.

The New York State Thruway Authority issued $833 million general revenue bonds (rated A1/A). The deal was well received, with the underwriter quoting premium bids once the deal began trading.

The high yield municipal market started the year strong. Lipper reported $291 million in net flows for the first full week, and the index has returned 0.74% year-to-date, with average yields declining to 5.52%. Performance began strengthening in mid-December as tax-loss selling remained modest. Since 17 December, the index has returned 1.00%. Key indicators like Buckeye Tobacco 5% coupon bonds signal stronger demand, returning 2.64% as yields dropped from 6.46% to 6.26%. New issuance has been light and should remain subdued in coming weeks as fund flows and reinvestment dollars build, further strengthening secondary market demand.

Municipal bond supply for 2026 is expected to reach a record $600 billion.

In focus: The GIC maps out 2026 bond opportunities

In its 2026 outlook, Nuveen's Global Investment Committee (GIC), which brings together the leaders of our global credit specialists, highlighted some of its top bond ideas for the year ahead.

The GIC maintains a broadly positive outlook, noting that yields remain attractive, credit fundamentals are strong and investor demand remains elevated. However, the committee encourages investors to capitalize on volatility from policy shifts and economic deceleration through broad diversification and active management.

Securitized assets, especially commercial mortgage-backed securities, stand out as a top choice given their strong fundamentals and attractive valuations.

Senior loans and collateralized loan obligations offer a compelling combination of attractive yields and solid value.

Municipal bonds remain among the GIC’s most preferred segments. The upward sloping nature of the yield curve is attractive and offers compelling yields for those looking to extend duration.

Emerging markets debt has performed strongly, with continued tailwinds expected, especially for corporate markets.

High yield corporates and preferred securities feature solid fundamentals with favorable long-term prospects.

The GIC takes a more cautious stance on U.S. Treasuries, which currently offer poor value, and investment grade credit, which faces potential headwinds from tight credit spreads and extended duration profiles.