Credit markets hold firm despite shutdown

Weekly fixed income update highlights

• Treasuries, investment grade and high yield corporates, MBS, CMBS, ABS and preferreds all posted gains.
• Senior loans and CLO returns were muted.
• Municipal bond yields were mixed. New issue supply was $7.8B, and fund inflows were $1.1B. This week's new issuance grows to $13.5B.

Fixed income markets posted broad gains as Treasury yields declined across the curve following weak employment data and U.S. government shutdown concerns. Credit sectors outperformed with investment grade leading the way. Municipal bonds benefited from substantial reinvestment flows, keeping the market well bid.

Watchlist

• 10-year Treasury yields declined last week.
• Spread sectors were positive versus similar-duration Treasuries.
• 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.

High yield corporate issuance nears a monthly record

The U.S. Treasury yield curve bull steepened last week, with yields falling across the curve, most notably at the front end. 2-year yields fell -7 basis points (bps) to 3.58%, while 10-year yields dropped -6 bps to 4.12%. The 30-year yield declined -4 bps to 4.71%. With the U.S. government shutdown delaying economic data, Wednesday's ADP report showed -32,000 private sector jobs lost in September, adding to labor market concerns. Markets now price in the likelihood of two more U.S. Federal Reserve rate cuts through year-end at 87% versus 73% last week.

Investment grade corporates returned 0.57% for the week and outperformed similar-duration Treasuries by 13 bps. Spreads tightened -2 bps, reversing last week's weakness. Strong equity returns and light primary market activity kept IG credit firmly bid. Inflows were strong at $10.6 billion, more than 30% higher week-over-week. Light supply of $15 billion should remain modest near-term as the earnings blackout begins. Preferred securities returned 0.19%, lagging similar-duration Treasuries by -17 bps.

High yield corporates gained 0.23%, matching similar-duration Treasuries. Lower-quality credits performed well, with CCCs outpacing BBs and Bs. Senior loans returned 0.03%. Issuance was healthy with $11.2 billion in high yield and $13.7 billion in loans. September became the third busiest month on record for high yield issuance at $57.7 billion. Inflows were strong with $1.2 billion in high yield and $493 million in loans.

Emerging markets gained 0.22%, underperforming similar-duration Treasuries by -17 bps. The asset class remains well bid given dollar weakness and Fed rate cut expectations, though spreads widened modestly due to geopolitical concerns and the government shutdown. Inflows continued to accelerate at $1.4 billion, with hard currency funds rising from last week to $826 million and local currency slowing to $578 million. Supply nearly doubled versus the prior week at $23.7 billion, mostly from investment grade sovereign issuers.

Muni yields flatten amid positive flows

The municipal bond yield curve flattened modestly last week, with short-term yields rising 4 bps and long-term yields declining -5 bps. The new issue calendar was well received. Weekly municipal fund flows were positive, including $239 million into exchange-traded funds. The new issue calendar is larger this week and should be well received.

The municipal market continues to show strength. Treasury stability provides a supportive backdrop for municipal bonds, while recent weeks have seen more manageable muni issuance levels despite the year's elevated supply. The 01 October influx of $35 billion in reinvestment capital has bolstered market liquidity. Tax-exempt yields remain compelling, drawing sustained interest from both retail investors and crossover buyers. We think this favorable environment should keep the municipal market well bid through year-end.

Los Angeles Department of Water and Power issued $1 billion power system revenue bonds (rated Aa2/NR). The deal was well received.

High yield municipals experienced a sharp acceleration of inflows last week. Combined with the 01 October reinvestment flows, this creates strong demand to absorb an expected seasonal supply increase. Consequently, we anticipate October should deliver more stable performance than typical. Leading indicator technical bonds traded sideways last week while the index average rose modestly. The Village of Lombard, Illinois, successfully remarketed and restructured bonds tied to a longstanding default and recovery from a convention center issuance.

The muni market received a significant boost from $35 billion in October reinvestment flows.

In focus: The GIC lays out the fixed income landscape

In its 2025 fourth quarter outlook, Nuveen's Global Investment Committee (GIC), which brings together the leaders of our global credit specialists, highlighted some of its best bond ideas.

The GIC notes that current yields remain attractive, credit fundamentals are strong and heathy demand for fixed income continues. However, bouts of volatility are likely to persist amid policy shifts and economic deceleration, creating more attractive entry points for increasing risk exposure. The GIC advocates maintaining a neutral duration stance while continuing to capitalize on attractive credit opportunities.

Municipal bonds represent one of the GIC's top market segments, with prices dislocated from underlying fundamentals primarily due to substantial supply increases. This dislocation creates compelling relative value opportunities.

Senior loans, collateralized loan obligations and securitized assets offer high yields and good value.

Emerging market debt ranks as a favored asset class due to improving fundamentals and appealing relative valuations.

High yield corporates and preferred securities feature solid fundamentals with favorable long-term prospects, though recent rallies have lifted valuations.

In contrast, the GIC is more cautious on investment grade credit (potential headwinds from tight credit spreads and long duration) and U.S. Treasuries (rich valuations).