High Yield Bonds Outperform as US Economy Shows Resilience: Nuveen

Fears of a looming US recession are receding as economic data points to a more resilient consumer and cooling inflation, according to a note published by Nuveen on September 30. Last week, the U.S. Treasury yield curve continued to steepen, with risk assets broadly outperforming.

The investment manager highlights positive economic data, including a decline in initial jobless claims and a second quarter GDP estimate exceeding expectations. The PCE index, a key inflation indicator, rose 0.1% in August, pushing inflation closer to the Federal Reserve's 2% target.

"Rates have peaked for this cycle," the note states, "and attention has pivoted toward the pace and size of rate cuts in response to softer growth and easing inflation."

Despite the positive outlook, Nuveen cautions against complacency. "Key risks" include a failure of inflation to continue moderating, policymakers struggling to balance inflation control with economic support, and intensifying geopolitical conflicts.

Last week, high yield corporates, senior loans, and emerging markets experienced modest positive total returns. Investment grade corporates, on the other hand, saw marginally negative returns, while Treasuries, taxable munis, and MBS were also slightly negative. Municipal bond yields remained essentially unchanged.

"The underlying growth outlook remains healthy thanks to strong consumer balance sheets and solid levels of business investment," the note states. "This combination should keep corporate defaults low."

The note also points out that "increased seasonal supply should provide an attractive entry point for municipal bonds."

Looking ahead, Nuveen recommends investing in credit with favorable income and solid fundamentals. "Credit selection remains key as we search for bonds with favorable income and solid fundamentals," the note states.