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Weekly Commentary

Treasury yields decline as economic data remain mixed

Anders Persson
Chief Investment Officer, Head of Global Fixed Income
Daniel J. Close
Head of Municipals
Elevator call buttons

Weekly fixed income update highlights

U.S. Treasury yields broadly fell again on mixed U.S. economic data. The European Central Bank and Bank of Canada both cut rates last week, as expected. We do not anticipate policy changes at this week’s U.S. Federal Reserve meeting.

Watchlist

  • 10-year U.S. Treasury yields fell last week, and we expect them to moderate further over the course of this year.
  • Spread sectors were mixed relative to Treasuries.
  • Increased seasonal supply should provide an attractive entry point for municipal bonds.

Investment views

Rates have probably peaked for this cycle, as attention pivots toward rate cuts in response to softer growth and easing inflation.

The underlying growth outlook remains healthy thanks to strong consumer balance sheets and solid levels of business investment. This combination should keep corporate defaults low.

Risk premiums may widen further, with entry points for taxable fixed income likely to become more attractive over the coming quarters. Credit selection is key as we search for bonds with favorable income and solid fundamentals.

Key risks

  • Inflation fails to continue moderating as expected, weighing on asset prices.
  • Policymakers unsuccessfully juggle fighting inflation with supporting economies still struggling to gain traction.
  • Geopolitical flare-ups intensify around the world.

Investment grade corporate new issuance outpaces 2023

U.S. Treasury yields generally declined again last week, with the 10-year yield ending -7 basis points (bps) lower at 4.43%. 2-year yields ticked up 1 bps. Ahead of Wednesday’s FOMC meeting, where we do not expect any changes to policy, the European Central Bank (ECB) and Bank of Canada both cut rates last week, as expected. In the U.S., economic data was mixed. Manufacturing sentiment deteriorated, the number of job openings fell and the unemployment rate ticked up. However, headline job creation remained strong, average hourly earnings beat expectations and services sector sentiment improved. Overall, the U.S. economy continues to expand, though we continue to anticipate a deceleration moving forward.

Investment grade corporates gained, returning 0.36% for the week, though the asset class lagged similar-duration Treasuries by -16 bps. Supply remained robust, with $35 billion pricing for the week, exceeding expectations. So far in 2024, the pace of new issuance is up 21% versus 2023. Those deals continue to be well-received by investors, with oversubscription rates averaging 3.3x last week leading to concessions of around 3.9 bps. Meanwhile, the asset class enjoyed the largest inflow in almost two months, with $6.2 billion entering the market.

High yield corporates outperformed, returning 0.43% for the week and beating similar-duration Treasuries by 22 bps. Senior loans returned 0.17%. Both asset classes enjoyed healthy inflows, with $1.2 billion entering the high yield market and $630 million flowing into loans. New issuance also remained healthy, with $8.6 billion and $44.7 billion pricing in high yield and loans, respectively. That new issuance continues to be dominated by refinancing and repricing activity, as corporates take advantage of the current tight level of spreads.

Emerging markets lagged somewhat, after recent strong performance, returning 0.06% for the week but underperforming similar-duration Treasuries by -39 bps. Despite the softer performance, inflows remained strong at $596 million, mostly into hard currency funds. Issuance was relatively muted, with only $5.2 billion pricing for the week, though those deals were met with strong demand and average subscription rates of 3.8x.

Municipal bonds see a strong rally

The municipal bond market experienced a strong rally last week. Short and long-term yields fell -19 bps and -17 basis points, respectively. New issuance saw a record high for the year and was well received. Fund inflows of $ 549 million included exchange-traded fund inflows of $260 million. This week’s new issuance should be manageable and well received.

The muni market rally occurred despite record new issuance for 2024. However, 01 June had $36 billion of reinvestment money and 01 July should have $37 billion. Muni bond prices should continue to recover some of the selloff experienced over the last few weeks, led by lower new issue supply and continued outsized reinvestment money.

The city of San Antonio, Texas, issued $1.1 billion electric and gas systems revenue refunding bonds (rated Aa2/AA-). The deal was well received and bonds traded in the secondary market at a premium to where they were issued. For example, 5 % coupons bonds maturing in 2036 came at a yield of 3.43%, and those bonds traded in the secondary market at 3.32%.

The high yield muni market continued its rally, with positive fund flows and limited supply keeping downward pressure on credit spreads. Land secured, charter schools and senior living sectors have outperformed, while tobacco and Puerto Rico continue to lag. Credit selection and broadening credit spread compression have been driving excess returns.

Muni bond prices should continue to recover from the recent selloff, led by lower new issue supply and outsized reinvestment money.

In focus: ECB pivots and prepares to wait         

For the first time since 2019, the European Central Bank has lowered its benchmark deposit rate — from an all-time high of 4% to 3.75% — leapfrogging the Federal Reserve and Bank of England in the easing race. At the same time, the central bank warned that price pressures remained.

The ECB stated that since its last rate hike in September 2023, “the inflation outlook has improved markedly” and that “inflation expectations have declined at all horizons.” As a result, “it is now appropriate to moderate the degree of monetary policy restriction.” However, the ECB cautioned that “it was not pre-committing to a particular rate path” since inflation is likely to stay above its 2% target “well into next year” before reaching 2% by 2026, according to the central bank’s latest projections.

ECB President Christine Lagarde added that further moves would “depend on the data we receive.” That data could include a pickup in growth, as the ECB now expects eurozone GDP to increase from 0.9% in 2024 to 1.6% in 2026, compared to 0.2% in 2023.

Annual headline inflation in the eurozone rose to 2.6% in May from 2.4% in April, while the core rate (excludes energy, food, alcohol and tobacco) edged up to 2.9% from 2.7%. Both readings topped forecasts.

We expect the ECB to ease policy by another 50 bps this year. This would lower rates to 3.25%, a level we would still describe as restrictive, or able to keep inflation in check.

   
Table of information for U.S. Treasury market, municipal market, yield ratios, and characteristics and returns
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Taxable-equivalent yield is the yield a taxable investment needs to possess (before taxes) for its yield to be equal to that of a tax-free municipal investment. The yields shown are based on the highest individual marginal federal tax rate of 37%, plus the 3.8% Medicare tax on investment income. Individual tax rates may vary. They do not take into account the effects of the federal alternative minimum tax (AMT) or capital gains taxes.

Performance: Bloomberg L.P.
Issuance: The Bond Buyer, 07 Jun 2024.
Fund flows: Lipper.
New deals: Market Insight, MMA Research, 05 Jun 2024.

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: Credit Suisse Leveraged Loan 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. 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.

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.

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