nuveen-weekly-fixed-income-update-5-11-15

Bonds Endure a Volatile Week as the Yield Curve Steepens Weekly Fixed Income Update

May 11, 2015

The Treasury market experienced extreme rate volatility last week, due mainly to investors unwinding positions in European bond markets. 10-Year Treasury yields climbed early in the week, peaking at 2.31% on Thursday. This marked the highest level since December 2014. However, rates reversed on Thursday and Friday as investors responded to more attractive valuations and a weakerthan-expected April Employment Report. Ultimately 10-year yields finished the

Tony Rodriguez

John V. Miller

Co-Heads of Fixed Income

week slightly higher.1

Mixed Returns for Non-Treasury Sectors

Municipal New Issue Lethargy Continues

Treasury rates rose early in the week, driven by selling pressure in German government bonds (bunds) due to an improving outlook for European growth and inflation.1 10-year bund yields spiked to an intra-day high of 0.78% on Thursday before reversing.1 U.S. rates were volatile around these technical flows, following bunds lower as Thursday progressed.1 A mixed payroll report on Friday showed 223,000 new jobs created in April, but March gains were revised lower to only 85,000 and average hourly earnings were soft. This caused rates to rally, with 2- and 5- year rates dropping more than long rates.1 The yield curve steepened, as a result with long rates ending higher and short rates marginally lower.1

The municipal market closed with slightly higher yields last week.

The market started with a weak tone, but closed stronger by Friday,2 although the higher close could not make up for earlier losses. Interest remains lacking in the outsized new issuance.3 Fund flows last week were -$211 million.4 This week’s robust new issue calendar is more than $8 billion.3 However, historical bond reinvestment money should provide solid demand in the summer, as $47 billion is projected in June and at least $50 billion in July.3

Most non-treasury sectors experienced negative returns for the week, as rising long yields negatively affected performance.2 The shorter-duration securitized and high yield sectors were exceptions, eking out small positive returns largely due to their shorter duration profiles.2 Spreads were largely unchanged for the week and did not offset the negative impact of rising rates.2 We expect the U.S. economy to improve in the second half of 2015, with the Federal Reserve (Fed) most likely increasing short-term rates in September. We think the Fed will be cautious and datadependent in its approach. Rate increases will be gradual, perhaps intermittent, and should not derail the credit sectors. We believe income-focused sectors, such a high yield, preferred securities and select investment grade corporate bonds are best positioned to benefit from this environment. Bottom-up security selection will become more important as the rate cycle progresses. ▪

The state of Louisiana sold $335 million general obligation bonds in the competitive market (rated Aa2/AA).5 Despite these solid ratings, these types of oil-producing credits are beginning to trade cheaper due to lower oil prices. About one-third of the deal remains in the underwriter’s inventory.

High yield municipals continued to resist higher interest rates, despite higher rates for high grades and U.S. Treasuries.2 High yield municipal flows were -$309 million last week and $1.65 billion year to date.4 We expect $1.29 billion in high yield new issuance this week.3 The ratio of high yield municipal to high yield corporate yields remains elevated.2 Puerto Rico warned that the government may need to implement near-term emergency measures due to liquidity shortfalls.6 Further, the Government Development Bank (GDB) indicated the potential PRIFA financing itself may not provide enough liquidity for the entirety of fiscal year 2016.6 In Illinois, 2013 pension reforms were overturned in court, dealing a major blow to the state and local governments' fiscal situations.7 There is a nearterm risk of a downgrade, but default risk remains very low. ▪

1 Bloomberg. 2 Barclays Live. 3 The Bond Buyer, May 8, 2015. 4 Lipper Fund Flows. 5 Market Insight, MMA Research, May 6, 2015. 6 Commonwealth of Puerto Rico Quarterly Report, May 7, 2015.

PRIFA stands for Puerto Rico Infrastructure Financing Authority. 7 "Illinois Supreme Court Overturns State's 2013 Pension Reform Law," Reuters, May 8, 2015.

NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

Bonds Endure a Volatile Week as the Yield Curve Steepens

U.S. Treasury Market

May 11, 2015

Municipal Market % Change

Yield 0.57 1.49 2.15 2.90

Week –0.02 –0.01 0.04 0.07

Month-to-Date Year-to-Date 0.01 –0.09 0.06 –0.17 0.12 –0.02 0.16 0.15

Source: Bloomberg. As of May 8, 2015. Past performance is no guarantee of future results.

Maturity 2-year 5-year 10-year 30-year

Yield to Worst 0.58 1.37 2.18 3.13

Yield Ratios Effective Duration (years) 6.51 9.79 4.03 5.54 5.73 5.51 7.29 3.98

Returns (%)

–0.11 –0.01 –0.36 –0.09 –0.12 –0.05 –0.27 0.07

Monthto-Date –0.21 –0.14 –0.47 –0.41 –0.48 –0.32 –0.76 –0.09

Yearto-Date 0.27 0.56 1.20 0.83 0.62 0.96 0.83 1.04

5.56

–0.21

–0.38

2.95

4.26 6.56

0.08 –0.22

0.10 –0.53

3.87 –1.40

Week

1 Yield difference between the Barclays High Yield Municipal Index and the 20-year AAA MMD scale. 2 Data is a subset of the S&P Short Duration Municipal Yield Index that is below investment grade/nonrated. Spread is the yield difference between this subset and the subset rated AAA. 3 Option-adjusted spread to Treasuries.

Source: Morningstar Direct; Barclays Live; Bloomberg. As of May 8, 2015. Past performance is no guarantee of future results.

Unless otherwise noted, the index is Barclays. All index returns are shown in U.S. dollars. Yield to worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting. Effective duration (expressed in years) measures the price sensitivity of a fixed-income investment to a change in interest rates, considering that expected cash flows will fluctuate as interest rates change. Index performance is shown for illustrative purposes only. Index returns include reinvestment of income and do not reflect investment advisory and other fees that would reduce performance in an actual client account. All indices are unmanaged and unavailable for direct investment.

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Any reference to municipal 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.

Barclays Municipal Index covers the USD-denominated tax-exempt bond market. Barclays High Yield Municipal Index covers the USD-denominated, below investment grade tax-exempt bond market. S&P Short Duration High Yield Municipal Index tracks the high yield municipal bond market with maturities from 1 to 12 years. Barclays U.S. Aggregate Index covers the U.S. investment grade fixed rate bond market. Barclays U.S. Treasury Index includes public obligations of the U.S. Treasury. Barclays U.S. Government-Related Index includes debt guaranteed, owned and sponsored by the U.S. government; it does not include debt directly issued by the U.S. government. Barclays U.S. Corporate Index is a broad-based benchmark that measures the investment grade, fixed-rate, taxable corporate bond market. Barclays U.S. Securitized Index is a composite of asset-backed securities, collateralized mortgage-backed securities (ERISAeligible) and fixed rate mortgage-backed securities. BofA Merrill Lynch Preferred Stock Fixed Rate Index is designed to replicate the total return of a diversified group of investment-grade preferred securities. Barclays High Yield 2% Issuer Capped Index measures the market of USDdenominated, non-investment grade bonds and limits each issue to 2% of the index. Barclays Global Aggregate Unhedged Index measures the performance of global bonds. It includes government, securitized and corporate sectors and does not hedge currency.

One basis point equals .01%, or 100 basis points equal 1%. The German bund is a bond issued

by Germany's federal government.

A WORD ON RISK

Month-to-Date Year-to-Date 0.05 0.10 0.07 0.05 0.06 0.14 0.08 0.27

Source: Municipal Market Data. As of May 8, 2015. Yields are for AAA-rated general obligation bonds. Past performance is no guarantee of future results.

Characteristics and Returns Yield Spread Index to Worst (%) (bps) Municipal 2.20 -High Yield Municipal 6.53 3591 Short Duration High Yield Municipal2 6.17 443 U.S. Aggregate Bond 2.20 433 U.S. Treasury 1.39 -U.S. Government Related 2.17 703 U.S. Corporate Investment Grade 3.08 1293 U.S. Securitized 2.46 193 BofA Merrill Lynch Preferred Stock 4.62 2043 Fixed Rate High Yield 2% Issuer Capped 5.96 4343 Global Aggregate (unhedged) 1.58 413

Week 0.01 0.03 0.02 0.05

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

10-year AAA Municipal vs Treasury 30-year AAA Municipal vs Treasury High Yield Municipal vs High Yield Corporate

Ratio (%) 101 108 110

Source: Bloomberg, Barclays Live, Thompson Reuters. As of May 8, 2015. AAA municipals represented by the MMD scale. The high yield ratio equals the yield-to-worst for the Barclays High Yield Municipal Index divided by the yieldto-worst for the Barclays High Yield Corporate Index. Past performance is no guarantee of future results.

“Treasury rates rose early in the week, driven by selling pressure in German government bonds."

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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.

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. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.

This information represents the opinion of Nuveen Asset Management, LLC and is not intended to be a forecast of future events and this is no guarantee of any future result.

It is not intended to provide specific advice and should not be considered investment advice of any kind. Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness. This report contains no recommendations to buy or sell specific securities or investment products. There is no assurance that an investment will provide positive performance over any period of time.

Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc.

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Maturity 2-year 5-year 10-year 30-year

% Change