![](/sites/default/files/styles/1086x410/public/Nuveen%20Fixed%20Income_0.jpeg?itok=JxvFjdWS)
Weekly Fixed Income Commentary: Treasury yields are mixed on varied economic data
Weekly fixed income update highlights
- Treasuries, investment grade corporates, MBS, senior loans and emerging markets all had positive total returns.
- High yield corporates and preferred securities had negative total returns.
- Municipal bond yields declined slightly. New issue supply was $5.7B with inflows of $672M. This week’s new issuance should be $10.6B.
The U.S. Treasury curve flattened amid hawkish central bank rhetoric and mixed economic data. U.S. jobless claims have increased materially in recent weeks, while the housing market showed unexpected strength.
Watchlist
- 10-year U.S. Treasury yields fell, and we anticipate further declines over the course of 2023.
- Spread assets were mixed relative to Treasuries.
- Increased seasonal supply should provide an attractive entry point for municipal bonds.
Investment views
“Higher for longer” rates remains as a theme, as the Fed battles to control inflation. Higher interest rates are likely to cause additional volatility.
The underlying growth outlook remains healthy thanks to strong consumer balance sheets and solid levels of businesses investment. This combination should keep corporate defaults low.
Treasury yields are likely to fall slightly this year, and we expect the 10-year Treasury yield to end 2023 around 3.25%.
We favor selectively taking on risk in this environment of attractive prices and yields. Credit selection is key as we search for bonds with favorable income and solid fundamentals.
Key risks
- Inflation fails to moderate as expected, weighing on asset prices.
- Policymakers tighten too rapidly, undermining the global economic expansion.
- Geopolitical flare-ups: China, Russia, Turkey, Iran.
Investment grade corporate spreads touch 2022 levels
U.S. Treasury yields were mixed last week, with the 10-year yield falling -3 basis points (bps) and the 2-year yield rising 3 bps. Another very hot CPI report in the UK prompted the Bank of England to hike rates by a surprising 50 bps at its policy meeting. Flash PMIs for June in Europe and the U.S. were generally soft. Initial jobless claims remained near recent highs, which remain historically low but have increased materially in recent weeks. The U.S. housing market showed unexpected strength, with housing starts rebounding 22% month-over-month after rates-driven weakness in recent months. Finally, Fed Chair Powell struck a hawkish tone in his congressional testimony, consistent with the prior week’s FOMC meeting.
Investment grade corporates rose again, returning 0.14% for the week, though the asset class lagged similar-duration Treasuries by -10 bps. Spread levels touched their end-2022 levels at 130 bps, though they widened slightly on Friday to end the week at 132 bps. Investment grade funds saw their 13th consecutive weekly inflow at $3.9 billion. The new issue market was somewhat subdued amid the U.S. holiday-shortened week, with only eight issuers bringing less than $14 billion of new supply.
High yield corporates softened after three weeks of strong gains. The asset class returned -0.76% and underperformed similar-duration Treasuries by -84 bps. Senior loans gained 0.17%. Unlike the investment grade market, leveraged finance markets saw robust new issuance, with $5.2 billion and $4.6 billion coming to market in the high yield and senior loan markets, respectively. Encouragingly, several of those were new money deals, including one LBO.
Emerging markets gained again, returning 0.29% for the week and beating similar-duration Treasuries by 10 bps. Local markets retreated -0.06%, though they experienced their third consecutive weekly inflow with $296 million entering the market. Hard currency funds saw outflows of -$167 million. As in U.S. leveraged finance, emerging markets saw a healthy amount of issuance, with six deals totaling $3.4 billion coming to market.
Municipal bond market continues to strengthen
Municipal bond yields were slightly lower for the second consecutive week. Weekly new issue supply was priced to sell and well received, and fund flows turned positive again. This week’s new issue supply is outsized and should be well received.
The municipal market continues to strengthen, driven by several factors. We are entering the second month of the $100 billion summer reinvestment money, with July 1 expected to provide $40 billion. Roughly 77% of the $6.9 billion tax-exempt bonds forced to liquidate from spring bank failures has been sold. The Fed decided to keep rates steady at the June meeting, but its continued commitment to controlling inflation is benefiting fixed income markets. We expect this positive tone to continue for the foreseeable future.
The Pennsylvania State University issued $205 million revenue bonds (rated Aa1/AA). The deal included 5% coupon bonds due in 2038 priced at 3.24%.
High yield municipal inflows were strong last week. The market firmed in response, shaping up June’s performance as we approach quarter end. This week showcases at least 10 high yield municipal bond deals, but many should have little volume. The market appears to be firming into a stronger rally, with July 1st cash flows around the corner and fund flows turning firmly positive.
The muni market benefits from $40 billion in reinvestment money in July.
In focus: Midyear 2023 outlook: Testing the waters
In our 2023 midyear outlook, Nuveen’s Global Investment Committee (GIC) provides our view of the fixed income market and best investment ideas.
Many market participants are holding high levels of cash and cash equivalents, preferring to simply earn what looks like a decent yield in today’s higher interest rate environment rather than invest in bonds.
However, the GIC believes that fixed income’s risk/reward tradeoff seems attractive, as the Fed’s aggressive tightening appears to be over. Rate volatility may remain high in 2023, especially on the front end of the curve, but the 10-year Treasury yield should trade between 3.25% to 3.75% in the second half of the year. And although recession odds have increased, the GIC doesn’t anticipate an especially long or deep contraction. Weakness across taxable and municipal markets ahead of a recession could offer enticing entry points if spreads widen.
Within taxable fixed income, since rates have likely peaked for this cycle, it may be prudent to reduce short-duration positions and move closer to neutral, as well as focus on higher-quality segments of individual asset classes.
Municipal bond fundamentals remain sound, with state/local governments flush with cash. Credit quality looks healthy, and valuations are still reasonable. The GIC sees compelling opportunities in high yield and longer-dated (15 year+) munis.
Performance: Bloomberg L.P.
Issuance: The Bond Buyer, 23 Jun 2023.
Fund flows: Lipper.
New deals: Market Insight, MMA Research, 21 Jun 2023.
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 provides investment advisory solutions through its investment specialists.
This information does not constitute investment research as defined under MiFID.