Tariff tensions and Fed outlook drive Treasury yields lower

Weekly fixed income update highlights

• Treasuries, investment grade and high yield corporates, MBS, preferred securities, senior loans and emerging markets all rallied last week.
• Municipal bond yields remained essentially unchanged. New issue supply was outsized again at $11B, and fund outflows were -$397M. This week’s new issuance is scheduled to be $13.8B.

U.S. Treasury yields rallied and spreads compressed for the second consecutive week as sentiment improved around the outlooks for tariffs and U.S. Federal Reserve rate cuts. Markets are pricing around a 70% chance that the Fed will lower interest rates by June.

Watchlist

• 10-year Treasury yields moved lower, and we continue to expect elevated volatility, a wider trading band and a modest rally from current levels.
• Spread sectors gained versus Treasuries amid signs of tariff policy progress.
• We expect the technical environment for municipal bonds to regain strength as the year progresses.

Investment views

More rate cuts are coming, but not immediately, as the Fed weighs still-strong economic data and the potential for higher inflation against deteriorating sentiment and a worsening medium-term outlook.

Downside risks are material, despite strong fundamentals, with tariffs likely to compress consumer spending and weigh on business fixed investment.

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

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.

Spread sectors see attractive performance

U.S. Treasury yields declined again last week, with the 10-year yield dropping 9 basis points (bps) to 4.24%. 2-year yields fell 5 bps. Although there was no substantive change in policy, the tone of rhetoric from President Trump and his team regarding tariffs improved. Separately, Fed officials indicated they would be ready to cut interest rates if the labor market weakened. Governor Waller said he “would expect more rate cuts, and sooner” if unemployment increased, while Cleveland Fed President Hammack said “if we have clear and convincing data by June, then I think you’ll see the committee move.” Markets are pricing around a 70% chance that the Fed will cut interest rates by June and around 3.5 total cuts in 2025.

Investment grade corporates rebounded again, returning 1.02% for the week and beating similar-duration Treasuries by 46 bps. Spreads tightened 7 bps on the IG corporate index. They are now 18 bps tighter than their post-tariff peak, though they remain 8 bps wider than their 02 April, pre-tariff level. Meanwhile, outflows continued at -$4.1 billion. Though that was a deceleration in the pace of outflows, it marked the largest three-week total since April 2020. The new issue market reaccelerated, with $24 billion pricing. That level was more than expected, but April overall is still tracking around 15% lower than expected given the volatility around tariffs earlier in the month. Supply was well digested, with average oversubscription rates of 4x and new issue concessions of 3.3 bps.

High yield corporates also rallied, returning 1.29% and outperforming similar-duration Treasuries by 106 bps. Senior loans returned 0.73%, the best single-week performance since early 2023. Spreads tightened by 38 bps in high yield bonds and 21 bps in senior loans. Outflows nevertheless continued, with -$1.5 billion exiting high yield funds and -$648 million leaving loan funds. Supply was steady, with $4.4 billion pricing in high yield and $2.3 billion in loans.

Emerging markets advanced as well, returning 1.14% and beating similar-duration Treasuries by 66 bps. As in U.S. corporates, spreads compressed, led by high yield names. Emerging markets sovereigns experienced spread narrowing of 18 bps, with high yield names 28 bps tighter and investment grade 9 bps tighter. Outflows continued, though at a slower pace, at -$313 million. Meanwhile, supply picked up, with $5.1 billion pricing, all from corporate borrowers, with healthy average oversubscription rates of 3.7x.

Muni bond issuance remains outsized

The municipal bond yield curve was basically unchanged last week. Short-term rates declined -2 bps while longer-term rates ended the week even. The new issue calendar remained outsized, and deals were priced cheaply. While net outflows continued overall, exchange-traded funds saw inflows of $396 million. This week’s new issue calendar will be extra large once again.

Muni bond prices are holding their own, which is a net positive considering the relentless new issue supply. While supply is expected to remain outsized through the end of the year, yields have found equilibrium. Nontraditional investors are buying munis now because tax-exempt bonds are trading almost as cheaply as taxable bonds. We expect this demand to continue for the foreseeable future if tax-exempt bonds remain cheap. Individual investors also continue their interest at these levels.

The state of Connecticut issued $1 billion general obligation bonds (rated Aa3/AA-). The deal was priced cheaply to help ensure it would clear the market. The deal was so well received that underwriters lowered final yields 5 bps on the short end and 15 bps on the long end.

High yield municipal yields were essentially unchanged last week, on average, as the market continues to offer investors usually high absolute yield opportunities. Net outflows eased somewhat. Some issues saw strong demand, such as COFINA 5% coupon bonds that rallied more than 10 bps at the end of the week. Nuveen is monitoring 11 high yield muni deals this week, including a large $260 non-rated deal for the Stanley Hotel complex in Estes Park, Colorado.

Investment grade corporate spreads are 18 bps tighter than their post-tariff peak.

In focus: Senior loans navigate uncertainty

The year began with expectations of a business-friendly, pro-growth Trump administration. Equities rallied, and high yield spreads tightened. But that risk-on mood has waned as the market digests Trump’s trade policies.

In anticipation of slowing economic growth, we favor a more defensive positioning by reducing allocations to lower-quality issuers. Looking ahead, we see opportunities to redeploy cash into companies whose loans we feel are fundamentally mispriced. We have identified higher quality loans that – in addition to offering healthy yields – have fallen in price. We are also seeing a number of lower priced, higher-yielding total return loans. Overall, we think investors should remain cautious and patient around adding risk to portfolios.

We believe the loan market has delivered on its value proposition for investors, offering high levels of income and insulation from equity and rate market volatility. With market yields ranging from 8% to 9%, on average, we think investors are being compensated for the fundamental market risks.

Given evolving U.S. trade and fiscal policies, along with geopolitical uncertainties, we believe active managers with scale, experience, a deep research team and cycle-tested credit underwriting skills may be best positioned to deliver for investors.