Markets anticipate another Fed rate cut

Weekly fixed income update highlights

• Treasuries, investment grade and high yield corporates, MBS, senior loans and emerging markets all had positive total returns.
• Municipal bond yields were slightly lower. New issue supply was $12.1B, and fund inflows were $1.2B. This week's new issuance is $10.8B.

U.S. Treasury yields moved lower, as mixed U.S. economic data supported the U.S. Federal Reserve lowering rates again later this month. Spread sectors broadly outperformed Treasuries.

Watchlist

• 10-year U.S. Treasury yield declined, as markets priced in higher odds of a December Fed rate cut.
• Spread sectors broadly outperformed Treasuries.
• Seasonal supply is drying up, but we should experience technical support for the forseeable future.

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.

Investment grade corporate spreads remain historically tight

U.S. Treasury yields moved modestly lower last week, with the 10-year yield ending -2 basis points (bps) lower at 4.15%. The 2-year yield fell more substantially, down -5 bps. Economic data were mixed, but Fed officials continued to signal a rate cut at the meeting later this month. The November jobs report showed a bounce in U.S. headline job growth in the establishment survey, with 227,000 net new jobs created based on responses from businesses. However, the parallel household survey showed a slowdown in job creation, with unemployment ticking up to 4.2%. That contradiction makes it more difficult to draw firm conclusions, but the overall trend toward slower conditions likely continues. This week's CPI inflation data will be the last major data release before the Fed's 18 December meeting. We continue to expect it to support another rate 25 bps rate cut.

Investment grade corporates gained, returning 0.50% for the week and outpacing similar-duration Treasuries by 2 bps. Spread levels were flat at 78 bps, modestly wider than their multi-decade tights of 74 bps achieved earlier this month, but still extremely tight versus history. The asset class had inflows of $3.9 billion, while new issuance was slightly lower than expected at $23.2 billion. Those deals enjoyed very robust demand, with average oversubscription rates of 5x and new-issue concessions of just 0.8 bps.

High yield corporates also advanced, returning 0.42% for the week and outperforming similar-duration Treasuries by 15 bps. Senior loans gained 0.18%, with the average loan price reaching its highest level since early 2022. With the recent rally in loans, 68% of the market is now trading above par, the highest percentage in more than six years. That dynamic continues to support repricing activity, with $55 billion of issuance for the week in loans. High yield saw $5 billion of new issuance. Both asset classes had inflows, with high yield receiving $429 million and loans $779 million.

Emerging markets rallied, returning 0.55% and beating similar-duration Treasuries by 12 bps. In the sovereign space, high yield corporates continued to compress, with spreads narrowing -10 bps versus a slight widening of 1 bp for investment grade names. Korean corporate spreads widened by around 10 bps, driven by political uncertainty after President Yoon declared martial law, though it was quickly overturned. Outflows continued, totaling -$756 million, while new issuance was modest at $4.3 billion.

Muni bond market inflows continue

The municipal bond yield curve ended the weekly slightly lower. Short-term muni yields declined -7 bps and long-term yields ended -5 bps lower. New issue supply was well received. Weekly fund flows were positive for the 23rd consecutive week, including $262 million in exchange-traded inflows.

The municipal market is alive and well, primarily due to $38 billion of reinvestment money available 01 December. However, munis have remained surprisingly resilient going into 2025. Munis are up 2.88% year-todate, and the yield is tax-exempt. We expect that solid performance to continue through the end of the year and into January, as outsized reinvestment money will hit the asset class on 01 January. This performance has been earned despite a record nearly $500 billion of new issue supply this year.

The State of Connecticut issued $785 special tax obligation bonds (rated Aa3/AA). The deal was priced to sell and was well received. For example, 5% bonds due in 2043 came at a yield of 3.45% and traded in the secondary market at 3.40%.

High yield municipal bond yields continued to decrease last week, but lagged the larger moves in high grade munis. The high yield muni market is absorbing a latent rush of primary deals, resulting in relative spread widening. Nuveen is following more than 20 deals for the remainder of the year, with most being pushed into this coming week. Meanwhile, fund inflows are accelerating, at $600 million last week following $300 million the previous week. If strong fund flows continue, we expect continued downward pressure on credit spreads.

The municipal market is alive and well, primarily due to $38B of reinvestment money available 01 December.

In focus: The GIC lays out the fixed income landscape

In its 2025 outlook, Nuveen's Global Investment Committee (GIC), which brings together the most senior investors across our core and specialist capabilities, highlighted some of its best bond ideas./em>

In the GIC's view, the global macroeconomic backdrop continues to favor bonds. Most central banks are in slow easing mode, and inflation risks are less acute than earlier in the cycle. Yields on longer-dated debt should remain elevated in 2025, offering attractive income. The GIC recommends maintaining a neutral duration profile overall, although a longer-duration stance in municipal bonds may be warranted given the steeper muni yield curve. The GIC also likes muni bonds thanks to strong issuer fundamentals and positive supply/demand dynamics.

Other asset classes worth considering:

Senior loans, as they should benefit in a higher-for-longer rates environment.

High yield corporates, especially higher quality issues, which are better able to weather a slowing economy.

Securitized assets, with asset-backed and commercial mortgage-backed securities offering value.

The GIC holds a more neutral view on preferred securities, although it sees opportunities in the $1,000 par segment. And the GIC is generally negative on U.S. Treasuries (better value elsewhere) and investment grade bonds (tight spreads and longer duration).

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