Duration Dashboard

The Treasury curve experienced a pronounced bull flattening, with intermediate maturities leading the rally. December’s CPI print at 2.9% year-over-year—slightly below consensus—catalyzed the move lower in yields. Despite the decline, rates remain at historically extreme percentiles, reflecting persistent concerns about fiscal sustainability and potential inflationary impacts from Trump’s policy agenda. The 5-year sector’s 14bp decline suggests markets are moderating expectations for aggressive near-term policy shifts.

Credit Pulse

Credit markets displayed remarkable resilience, with spreads compressing further to extreme tights despite the political transition uncertainty. High-yield spreads at the 11th percentile reflect unwavering confidence in corporate fundamentals and the growth outlook. The VIX’s sharp decline to the 25th percentile suggests options markets are pricing minimal near-term disruption from policy changes, potentially underestimating tail risks around trade policy implementation.

Federal Reserve Policy Outlook

The December CPI data solidifies market expectations for a Fed pause at the January 28-29 FOMC meeting, with futures pricing less than 5% probability of any policy action. The combination of still-elevated core inflation at 3.2% and uncertainty about incoming administration policies creates a compelling case for the Fed to maintain its wait-and-see approach. Chair Powell faces the delicate task of maintaining central bank independence while navigating potential pressure from the new administration.

Markets have dramatically repriced 2025 rate cut expectations, with only 50 basis points of easing now priced through year-end—down from 100 basis points expected just weeks ago. This hawkish repricing reflects both the economy’s resilience and concerns that Trump’s fiscal stimulus and trade policies could reignite inflationary pressures. The Fed’s challenge will be distinguishing between transitory policy-induced price shocks and persistent inflation requiring monetary response.

Week Ahead: Inauguration and Policy Clarity

• Trump inauguration (Jan 20): Markets will parse every word of the inaugural address for policy signals, particularly on trade and immigration. Executive orders expected on Day One could trigger immediate market reactions across currencies, commodities, and rates.
• Treasury auctions: Next week’s 2-year, 5-year, and 7-year auctions will test demand at these elevated yield levels. Foreign participation remains a key metric given concerns about fiscal sustainability and potential reserve diversification.
• Corporate earnings acceleration: Bank earnings will provide early reads on net interest margin compression expectations and commercial real estate exposure. Technology sector guidance will be scrutinized for AI investment sustainability.
• Economic data calendar: Housing starts and existing home sales data will reveal whether lower mortgage rates are beginning to thaw the frozen housing market. Initial jobless claims remain critical for labor market monitoring.

US Economic Positioning and Global Context

The week’s market action underscores the delicate balance between US economic exceptionalism and policy uncertainty. Treasury yields remain near historical extremes despite the week’s decline, reflecting both strong growth fundamentals and fiscal sustainability concerns. The dollar’s resilience, even as yields retreated, suggests international investors maintain confidence in US assets despite political transition risks.

Global divergence: As markets await Trump’s policy specifics, the contrast between US dynamism and global weakness becomes more pronounced. European growth concerns and China’s structural challenges reinforce the dollar’s haven status, potentially limiting any sustained Treasury sell-off. However, this divergence also amplifies risks should Trump’s policies disrupt global trade flows or trigger retaliatory measures from trading partners.