Treasury yields retreat as the Fed signals a pivot

Weekly fixed income update highlights

• Treasuries, investment grade and high yield corporates, taxable munis, CMBS, preferreds, senior loans, CLOs and emerging markets all rallied.
• MBS, CMBS and preferreds outperformed similar-duration Treasuries, while investment grade corporates, high yield corporates and emerging markets lagged.
• Municipal bond yields were mixed. New issue supply was $8.7B, and fund inflows were $2.3B. This week’s new issuance is light at $7.3B.

U.S. Treasury yields moved lower after U.S. Federal Reserve Chair Powell leaned dovish in his comments at Jackson Hole. He noted rising employment risks and possible policy adjustment, indicating a likely September rate cut.

Watchlist

• Treasury yields declined, but remain near our year-end targets.
• Spread sectors were mixed versus Treasuries as the economic outlook remained murky.
• We expect the technical environment for municipal bonds to improve over the remainder of the year.

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.

Heavy investment grade corporate issuance expected in September

U.S. Treasury yields declined last week, with 10-year yields down 6 basis points (bps) to 4.26% and 2-year yields down 5 bps to 3.70%. That rally occurred after Fed Chair Powell’s dovish comments at the Jackson Hole conference on Friday. He said “downside risks to employment are rising” and the “balance of risks may warrant adjusting our policy stance.” While Powell also expressed concern about upside inflation risks, on balance he signaled a rate cut at the September meeting is likely. We expect a cut at that meeting and one more later this year. Powell also said the relatively stable labor market “allows us to proceed carefully,” which we think means a 50 bps cut is unlikely in September. Separately, economic data was mixed earlier in the week. Flash purchasing managers’ indexes (PMIs) for August showed improving momentum in both the U.S. and Europe, with the composite PMIs reaching 55.4 and 51.1, respectively. Those are the highest levels this year, signaling the fastest pace of expansion. However, U.S. jobless claims also ticked higher to a fresh cyclical high. While they remain historically low, the recent trend is consistent with further deterioration in the labor market.

Investment grade corporates advanced, returning 0.36% for the week, though the asset class underperformed similar-duration Treasuries by 11 bps. Spreads widened 2 bps to 75 bps after touching multidecade tights the prior week. Issuance was relatively quiet at $25 billion, and this week should be similarly muted. Looking ahead, as much as $175 billion of supply is expected in September, with almost half of that volume likely in the first week of the month.

High yield corporates also rallied, returning 0.27%. The asset class lagged similar-duration Treasuries by 1 bps. Longer-duration segments generally outperformed, with BB rated corporates returning 0.33% versus CCC rated corporates at 0.25%. Senior loans returned 0.13%. Supply was muted across both markets amid the summer holidays.

Emerging markets were mixed, returning 0.14% but lagging similar-duration Treasuries by 30 bps. Despite a selloff in the dollar after Fed Chair Powell spoke and a rally in commodity prices, the asset class underperformed other fixed income segments. Spreads widened 8 bps after compressing around 17 bps over the prior two weeks, which was their best two-week stretch since late April.

Municipal yield curve steepens amid strong investor demand

The municipal bond yield curve steepened last week, with short-term yields declining 6 bps while long-term yields edged up 1 bps. Moderate new issuance was absorbed smoothly, accompanied by the strongest fund inflows in 18 months. These inflows included a significant tactical allocation shift by a major money manager, with exchange-traded fund inflows reaching $2.2 billion. This week’s new issue calendar remains light due to the U.S. holiday but should meet with favorable reception.

Municipal bonds continue to demonstrate resilience despite substantial new issuance, supported by several factors: Treasury market stability, robust summer reinvestment flows, and investor attraction to the steep municipal yield curve and compelling real yields. Intermediate muni bonds offer approximately a 4% tax-exempt yield – 100 bps above the inflation rate – while long-term munis provide around a 5% taxexempt yield, representing a 200 bps real return.

Pennsylvania Turnpike Commission revenue bond issuance (rated Aa3/AA- for senior lien) featured 5% coupon bonds due in 2050 offered at par, exemplifying the attractive 5% yields available from quality tax-exempt bonds at the long end of the curve.

High yield municipal bond yields declined last week as investor interest strengthened. Fund inflows reached $1.9 billion, including a $1.5 billion conversion to an exchange-traded fund structure. Nevertheless, the remaining $400 million represents the strongest weekly inflow in recent months. Puerto Rico Electric Power Authority (PREPA) bond prices continued their upward trajectory, reflecting improved prospects for a more collaborative restructuring process following changes to the Fiscal Oversight Board. Nuveen is monitoring at least 16 deals in the coming week, providing ample opportunity for selective credit positioning.

Long-term municipals provide around a 5% tax-exempt yield, representing a 200 bps real return.

In focus: Nuveen adds color to its fixed income holdings

Nuveen’s fixed income ESG/impact platform embeds responsible investing standards into actively managed strategies that help address many of the world’s large-scale systemic challenges. The Women’s Livelihood Bond (WLB) series continues that process.

The series consists of multi-country, gender-focused debt securities managed by the Singapore-based Impact Investment Exchange, which has mobilized nearly $500 million in private-sector capital since 2009. Proceeds from this WLB bond — the seventh and latest in the series — are designed to help finance enterprises owned and operated by over 700,000 women in India, Indonesia, the Philippines and Sri Lanka across sectors including financial inclusion, sustainable agriculture, clean energy and water and sanitation.

The current WLB offering, issued in July 2025 and maturing in 2029, has gained strong stakeholder support, reflecting momentum in the “Orange Bond” market and demand for gender-responsive investments. (Orange bonds are named after the United Nations’ icon for gender- and sustainability-based investing.) Nuveen has served as the lead investor in WLB series 2-7 and is a member of the steering committee involved in the development of the Orange Bond Initiative, which aims to reach 100 million women worldwide and provide $10 billion in fiscal support.