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Weekly fixed income update highlights
- Treasuries, taxable municipals, investment grade and high yield corporates, preferreds and emerging markets had positive total returns.
- Mortgages and senior loans retreated.
- Municipal bond yields increased. New issue supply topped $11.4B, and fund inflows were $994M. This week's new issuance is $2.4B.
Fixed income markets absorbed early-week tariff-related volatility and rallied as spreads tightened in most asset classes. Strong investor demand supported bonds ahead of Wednesday's U.S. Federal Reserve meeting. The central bank is expected to hold rates steady.
Watchlist
- 10-year Treasury yields were flat last week, and we expect a modest rally from current levels.
- Spread sectors generally outperformed versus similar-duration Treasuries ahead of this week's Fed meeting.
- 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 spreads hit tightest levels since 1998
U.S. Treasury yields were volatile last week but ended nearly flat. 10-year yields rose as much as 8 basis points (bps) early in the week after President Trump threatened to annex Greenland and impose 10% tariffs on several European countries. Yields mostly retraced after Trump walked back the threats on Wednesday. 10-year yields ended the week flat, while 2-year yields ended 1 bp higher. The Federal Reserve meets on Wednesday, and we expect no policy change as stronger recent labor market data have weakened the case for near-term rate cuts.
Investment grade corporates advanced 0.20%, beating similar-duration Treasuries by 15 bps. Spreads tightened 2 bps to reach 72 bps, matching the tightest levels since 1998. Inflows remained robust at $8.9 billion, while supply totaled just under $21 billion. Demand for new deals remained extremely healthy, with oversubscription rates averaging 4.8x and concessions of only 0.3 bps.
High yield corporates also gained, returning 0.10% and outperforming similar-duration Treasuries by 5 bps. Unlike investment grade high grade, high yield spreads widened 5 bps, though they remain narrow at 256 bps. Senior loans retreated -0.09%. High yield funds saw material outflows of -$1.4 billion, while loan funds had inflows of $160 million. New issuance was healthy at $11.3 billion for high yield bonds and $15.7 billion for loans.
Emerging markets continued to perform well, returning 0.20% and outpacing similar-duration Treasuries by 15 bps. Spreads tightened broadly, with high yield and investment grade sovereign spreads narrowing 18 and 6 bps, respectively. Inflows jumped to $2 billion. Supply was healthy at nearly $18 billion, primarily in corporates, where spreads also tightened, though less than sovereigns.
High yield munis weather Treasury volatility
The municipal yield curve ended the week slightly higher. Short-term muni yields rose 1 bp while long-term yields rose 8 bps. Fund flows were positive again, including $338 million into exchange-traded funds. New issue supply should be light this week due to the Fed meeting but should be well received.
The muni market remains well bid. New issue supply is increasing, and demand remains robust. Reinvestment funds total $47 billion available 01 February and $32 billion available 01 March. We expect munis to remain well supported.
Maryland Health and Higher Educational Facilities Authority (Medstar Health) issued $724 million revenue bonds (rated A2/A). The deal was well received, with strong demand pushing prices higher in early trading.
High yield muni yields increased just 4 bps compared to 8 bps for long-term AAA-rated munis. Large index constituents - particularly Puerto Rico and industrial development bonds most exposed to Treasury-sensitive dealers and ETF market makers - drove the widening. Fund flows were strong again at a net $341 million. New issuance was light at only six deals totaling $55 million. Secondary trading was quiet as investors grew cautious early in the week about Treasury market volatility affecting munis. We expect strong demand this week as the new issue calendar remains light and yields are more attractive.
High yield corporate spreads widened 5 bps, though they remain narrow at 256 bps.
In focus: Investment grade issuance could reach new heights in 2026
The primary market closed a historic 2025 with nearly $1.6 trillion in new issuance — the second-highest annual total on record.
Investment grade corporate supply is expected to be even greater in 2026, creating significant opportunities for active investors. AI-driven capital expenditures across the technology and utilities sectors continue to accelerate, while renewed M&A financing activity should contribute meaningfully to robust gross supply. This elevated issuance environment could generate attractive new issue concessions and create favorable entry points across sectors and rating categories.
The transformative expansion of AI infrastructure presents one of the year's major investment themes. Hyperscalers are projected to tap capital markets for nearly $1.5 trillion over the next three years as ambitious capital expenditure programs outpace anticipated operating cash flows. This financing wave extends beyond technology companies — the massive electricity requirements of AI data centers are fueling heavy borrowing activity throughout the utilities and energy sectors, broadening the investment opportunity set.
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Senior loans currently feature a combination of discounted prices and healthy fundamentals.
Chair Powell said that the Fed is “well positioned to wait and see how the economy evolves,” indicating less urgency to cut rates again.
We invite you to learn more about our “Five themes for 2026,” in our latest GIC outlook.
Performance: Bloomberg L.P.
Issuance: J.P. Morgan, 23 Jan 2026.
Fund flows: Lipper.
New deals: Market Insight, MMA Research, 21 Jan 2026.
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: S&P UBS Leveraged Loan Index; CLO AA: J.P. Morgan Collateralized Loan Obligation AA Index; CLO
BB: J.P. Morgan Collateralized Loan Obligation BB 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. These risks may be magnified in emerging markets. 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. Any investment in collateralized loan obligations or other structured vehicles involves significant risks not associated with more conventional investment alternatives.
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.
