Signs of easing inflation push bond yields lower

Weekly fixed income update highlights

• Treasuries, MBS, investment grade and high yield corporates, preferreds, senior loans and emerging markets all moved higher last week.
• High yield corporates and MBS led outperformance versus Treasuries, with preferreds, CMBS and investment grade corporates also recording positive excess returns.
• Municipal bond yields declined. New issue supply was outsized at $13B, and fund outflows were -$252M. This week’s new issuance is again outsized at $9.9B.

Consumer price data signaled that inflation pressures may be easing (at least for now), which allowed fixed income markets to enjoy positive returns.

[Like what you’re reading? Sign up here for Nuveen’s weekly market insights to receive content like this delivered to your inbox every Monday.]

Watchlist

• U.S. Treasury yields fell last week, although we expect yields to remain rangebound during 2025.
• Spread sectors generally outperformed Treasuries.
• We expect the technical environment for muncipal bonds to remain strong this year.

Investment views

Rates have peaked for this cycle, and attention has pivoted toward the pace and size of 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 remains 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.

Demand for senior loans continues

U.S. Treasury yields fell last week, with 10- year yields dropping -13 basis points (bps) to 4.63%. That rally reversed most of the selloff from the prior two weeks. 2-year yields fell 10 bps to 4.29%, also erasing most of the recent move higher. Most of the yield decline was driven by Wednesday’s benign inflation data, which showed core prices rising 0.2% monthover-month, slightly lower than expected. The yearover-year pace also ticked down to 3.2%, matching the lowest rate since early 2021. We continue to forecast a further, modest deceleration in core inflation this year, with core PCE inflation likely to fall to around 2.5%. That forecast includes some upward pressure on core goods prices from higher tariffs, but there is a risk of larger tariffs and a near-term increase in inflation

Investment grade corporates rallied, returning 1.07% last week, beating similar-duration Treasuries by 8 bps. New issuance was heavy, dominated by the six largest U.S. banks. Those issuers totaled around 80% of the $57.7 billion of new supply, and at least two nonbank issuers deferred their planned issuance until the calendar is lighter. Those deals were overall 3x oversubscribed with new issue concessions of around 1.2 bps, which continues to indicate very strong primary demand from investors. Inflows remained positive, at $2.3 billion, though that was slower than the prior week and down from the average during the fourth quarter of 2024.

High yield corporates also outperformed, returning 0.80% for the week, outpacing similarduration Treasuries by 30 bps. Senior loans returned 0.13%, with the loan market remaining dominated by refinancing activity. $37 billion worth of new deals priced last week, while the high yield market has been more muted, at a relatively modest $3.8 billion. Loan funds have also continued to experience robust inflows, totaling $1.4 billion for the week. High yield funds had small outflows of -$60 million.

Emerging markets also advanced, returning 0.67%. New issuance was healthy at $17.6 billion, with those deals 4x oversubscribed on average. Despite that indicator of strong demand, outflows continued from emerging market funds, totaling -$443 million, with the majority coming from hard currency funds.

Municipal bonds continue to enjoy strong fundamentals

The municipal yield curve ended last week lower, with both short- and long-term yields falling -2 bps. Weekly new issue supply was outsized and was well received. Fund flows were negative, including -$168 million in exchange traded fund outflows. This week’s new issue supply should be large, especially given the U.S. holiday-shortened week. We expect new issues to be well received and priced to sell.

Investor attention remains focused on the California wildfires. The devastation is heartbreaking, and our thoughts are with those families at the center of the tragedy. From an investment perspective, we believe essential service bonds will remain solid investments. Prices of bonds at the heart of the devastation have understandably fallen, but bidding remains constructive, and we believe fundamentals are sound.

San Francisco Airport Commission issued $948 million of revenue bonds (rated A1/AA). The deal was well received, and some bonds traded in the secondary market at a premium. This demonstrates the strength of the broader bond market.

High yield municipal bonds experienced fund inflows last week of $244 million, in contrast to the broader muni market. High yield inflows now stand at $771 million year-to-date. New issuance has been modest, and we think a more stable rates environment should act as a tailwind.

Despite the devastation from the wildfires, we believe California essential service bonds remain solid.

In focus: Loans look to extend two-year rally

After gaining 13.3% in 2023, senior loans returned a solid 9% last year. Loans also remain one of the highest yielding liquid fixed income asset classes, with a yield to three year of 8.25% as of 31 December. Heading into 2025, the economic and market backdrop appears favorable.

Carry was the primary source of returns for loans in 2024, with +9.37% from income alone. Regarding credit ratings, single B rated loans (+9.55%) led last year’s advance, followed by CCCs (+8.87%) and double Bs (+8.15%). With markets anticipating pro-growth policies from the Trump administration, overall rates should stay elevated, providing a tailwind for senior loans to deliver high levels of current income while insulating investors from traditional interest rate risk. Market technicals should continue to support secondary price levels, and M&A activity is likely to create new-issue opportunities to deploy cash at attractive yields

The Fed rate cuts we’ve seen so far should flow through to help lower-rated borrowers, but not all sectors or companies will benefit to the same extent — emphasizing the importance of active management. Additionally, given evolving U.S. trade and fiscal policies on the horizon, along with geopolitical uncertainties, active managers with scale, experience, a deep research team and robust underwriting skills may be best-positioned to deliver positive outcomes for investors, in our view.