Treasury yields rise amid mixed economic data

Weekly fixed income update highlights

• High yield corporates and senior loans posted positive total returns, while CMBS, ABS and preferreds outperformed similar-duration Treasuries.
• Treasuries, investment grade corporates and MBS had negative total returns.
• Municipal bond yields declined substantially. New issue supply was outsized again at $16B, and fund inflows were $1.6B. This week’s new issuance is scheduled to be $9.6B.

U.S. Treasury yields increased and risk sentiment improved as U.S. economic data remained generally upbeat. Most headline weakness was likely due to one-off trade effects, which should reverse in the quarters ahead. Underlying growth remained stable. The U.S. Federal Reserve is scheduled to meet this week.

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Watchlist

• Treasury yields moved higher, and we continue to expect elevated volatility, a wider trading band and a modest rally from current levels.
• Spread sectors gained versus Treasuries amid better economic data.
• We expect the technical environment for municipal bonds to improve as the year progresses.

Investment views

Yields present the best entry point in a generation, creating attractive income opportunities.

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

Preferred securities get a boost from strong bank earnings reports

U.S. Treasury yields rose last week, with overall economic data better than expected. The 10-year Treasury yield increased 7 basis points (bps) to 4.31%, while the 2-year yield rose 8 bps. Though U.S. GDP growth was negative in the first quarter (-0.3% annualized), the details showed ongoing resilience. Most headline weakness was likely due to one-off trade effects, which should reverse in the quarters ahead. Underlying growth remained stable at a healthy pace of around 3.0%. Separately, U.S. job creation in April was stronger than expected and the unemployment rate remained stable, while a closely watched survey of manufacturing sentiment was better than expected. Finally, the drips of tariff-related news skewed positive.

Investment grade corporates softened, returning -0.43% for the week and lagging similar-duration Treasuries by 15 bps. Preferred securities performed better – helped by strong bank earnings reports – beating similar-duration Treasuries by 19 bps. The technical backdrop was mixed, with supply exceeding expectations at almost $35 billion. Those deals were met with strong demand, averaging oversubscription rates of around 4x and resulting in new issue concessions of just 1.4 bps – well below the year-to-date average of close to 4 bps.

High yield corporates advanced, returning 0.27% and beating similar-duration Treasuries by 33 bps. Senior loans also performed well, rallying 0.37%. The loan asset class has now advanced for four straight weeks with a 1.57% return over that period, the best such stretch since 2023. Inflows returned, with $2.6 billion entering high yield funds and $75 million flowing into loans. Supply remained muted in both markets, totaling $2.6 billion and $1.6 billion in high yield and loans, respectively, though it is set to pick up moving forward given better valuations and lower volatility.

Emerging markets were close to flat, returning -0.16% but outpacing similar-duration Treasuries by 7 bps. Emerging markets currencies continued to rally versus the dollar, helping the asset class, but this was partially offset by a further fall in commodities. Crude oil prices fell -7.5% to reach their lowest level since early 2021. That dynamic weighed on oil-exporting countries, which may see their terms of trade deteriorate. Separately, supply surged across the asset class at $21 billion, and inflows returned at $455 million.

Municipal bond fund inflows return

The municipal bond yield curved ended substantially lower last week. Short-term muni yields declined -11 bps and long-term yields fell -10 bps. Outsized new issue supply was priced to sell and well received. Fund flows turned positive after seven weeks of outflows, including exchange-traded fund inflows of $1.8 billion. This week’s scheduled new issue calendar is undersized, but many deals are waiting to be issued. If issuance is well received at the beginning of the week, we expect additional deals to come to market.

Municipal bonds are yielding as much as their taxable counterparts due to heavy new supply. This trend is enticing crossover buyers, who would buy a tax-exempt bond because of the favorable risk profile. Individual investors have renewed interest in municipal bonds, as 4% yields on intermediate bonds and 5% yields on long bonds remain appealing. And the municipal market should enjoy solid demand for the next several months. $40 billion in reinvestment money came into the market 01 May 1, and we expect at least that amount (and growing) in June, July and August.

Los Angeles Department of Water and Power issued $991 million power system revenue bonds (rated Aa2/NR). The deal was originally priced cheaply to clear the market, but short- and long-bond yields were lowered 11 bps and 20 bps, respectively, upon final pricing.

The high yield municipal market is looking far more stable. Reinvestment flows from 01 May are working to strengthen demand, and net flows are positive. The benchmark deal last week – a $400 million deal for an American Airlines key maintenance facility in Tulsa, OK – was 17x oversubscribed.

The loan asset class has advanced for four straight weeks with a 1.57% return over that period, the best such stretch since 2023.

In focus: The securitized sector offers a port in a storm

The securitized sector offers potential refuge in this environment of slower growth, higher inflation and economic uncertainty. And it benefits from being relatively immune to tariff policy.

The agency mortgage-backed, residential mortgage credit and commercial mortgage-backed sectors have been among the best performers year-to-date, with CMBS and agency MBS returning more than 2.5% while the S&P has declined over -3%.

Housing and real estate more broadly stand out as resilient sectors:

Home mortgages are one of the first expenses to get paid, even when Americans face household budget pressure. Americans have also accumulated significant home equity over the last several years, decreasing the chances of default.

Home price appreciation has been supported by the chronic U.S. housing supply/demand imbalance. Multifamily commercial real estate (CRE) has benefited from this trend as Americans struggle to afford the cost of homeownership.

New construction projects have been pressured due to rising materials prices, leading to reduced overall supply. This should provide a tailwind for existing housing and CRE.

Industrial properties should benefit from increased demand for manufacturing and storage needs as manufacturing and supply chains evolve.