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Weekly Commentary

Treasury yields decline on softer inflation data

Anders Persson
Chief Investment Officer, Head of Global Fixed Income
Daniel J. Close
Head of Municipals
sketch of stairs from side

Weekly fixed income update highlights

U.S. Treasury yields declined across the curve last week after another encouragingly soft set of U.S. inflation data. Dovish comments from U.S. Federal Reserve Chair Jerome Powell on the labor markets represented a substantive change from prior rhetoric.

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 fared well, with lower-quality segments outperforming.
  • 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.

High yield corporates continue to outperform

U.S. Treasury yields fell sharply last week, with the 10-year yield down 9 basis points (bps) to 4.18%, its lowest level since March. 2-year yields fell 15 bps to 4.45%, the lowest since February. The main driver was another softer-than-expected CPI report, which showed headline prices falling -0.1% in June. Core prices rose 0.1%, taking the year-over-year rate to 3.3%, its slowest rate of increase since early 2021. Encouragingly, shelter inflation slowed by more than it has over recent months, and other core services moderated. Separately, Chair Powell leaned dovish in his testimony to Congress, highlighting that “inflation is not the only risk we face” and that the labor market “appears to be fully back in balance.” This is a substantive change from his prior rhetoric that described the labor market as still moving into better balance. We expect the Fed to continue moving in this dovish direction and signal the first rate cut to come as soon as September.

Investment grade corporates advanced, returning 0.82% and beating similar-duration Treasuries by 1 bps. Inflows slowed to $2.9 billion after the prior week’s 17-week high of $8.3 billion. The new issue market continues to be robust, with 10 issuers bringing almost $20 billion of supply for the week. Those deals met robust demand, with oversubscription rates of 4.2x on average and new issue concessions of 2.6 bps, nearly a full basis point lower than the year-todate average. Separately, preferreds returned 0.71% for the week. At a 6.46% return year-to-date, the asset class is outpacing all other major fixed income segments.

High yield corporates outperformed again, returning 0.80% for the week and outpacing similarduration Treasuries by 30 bps. The asset class has offered positive returns for six straight weeks, and yields are now within a few basis points of their year-to-date lows. Senior loans returned 0.18% for the week and are now 4.82% on the year, second only to preferreds across major asset classes. Inflows in both markets remained healthy, with $676 million flowing into high yield and $444 million into loans.

Emerging markets were stronger, returning 0.90% for the week and outperforming similar-duration Treasuries by 16 bps. Inflows continued, with $208 million flowing into the asset class, concentrated in hard currency funds. New issuance totaled $10.7 billion, dominated by a three-tranche, $6 billion deal from Saudi Aramco, which met with very healthy demand and saw pricing tighten as much as 35 bps.

High yield muni market support continues

Municipal bond yields ended the week lower. Short-term yields declined -14 bps, while the long end closed -5 bps lower. Weekly new issuance was outsized once again. Fund flows were positive, including exchange-traded inflows of $626 million. This week’s new issue calendar is outsized once again. It should be priced to sell and well received.

The municipal market should remain well bid. for the foreseeable future, supported by a stable Treasury market. Outsized tax-exempt supply continues, along with strong demand. 01 August brings an additional $43 billion of reinvestment money.

The District of Columbia Water and Sewer Authority issued $506 million public utility revenue bonds (rated Aa2/AA+). The deal was priced to sell and well received. Some bonds traded in the secondary market at a premium. For example, 5% coupon bonds due in 2034 came at a yield of 3.02% and traded later at 2.92%.

The conditions supporting a continued high yield muni market rally are firmly in place. Strong inflows continued at nearly $300 million last week, taking the year-to-date total to $7.9 billion. New issuance remains heavily oversubscribed, pressuring credit spreads downward. Scarce bid-wanted lists are gaining high focus in the secondary market and are firmly bid. This week, Judge Swain has stayed all Puerto Rico Electric Power Authority (PREPA) litigation for 60 days and is increasing pressure on both sides to move toward a more consensual settlement.

At a 6.46% return year-to-date, preferred securities are outpacing all other major fixed income segments.


In focus: IG corporate issuance is expected to slow

Investment grade corporate gross issuance totaled $874 billion in the first half of the year, second only to the first half of 2020. Issuance outpaced the same period in 2023 by 23%, mainly due to historically tight spreads and a desire to secure financing ahead of potential market volatility fueled by the U.S. elections.

Despite the high level of issuance, demand remains strong. Investment grade corporate spreads tightened 5 bps in the first half of the year to close the second quarter at 90 bps. Deals were well over-subscribed and priced with minimal new-issue concessions.

Supply forecasts for the year as a whole have increased modestly given the first half’s supply boom. Investment grade corporate issuance tends to be front loaded, with second-half supply typically declining by around 20%. We expect this trend to be even more pronounced in 2024, with second-half supply decreasing by up to 35%.

We believe investment grade corporate technicals should support valuations as supply normalizes to a slower pace amid still-strong demand.

    
Table of information for U.S. Treasury market, municipal market, yield ratios, and characteristics and returns
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Performance: Bloomberg L.P.
Issuance: The Bond Buyer, 12 Jul 2024.
Fund flows: Lipper.
New deals: Market Insight, MMA Research, 10 Jul 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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