Duration Dashboard

Treasury markets demonstrated unusual calm during Trump’s inauguration week, with yields declining just 1-2 basis points across the curve despite the administration signing 26 executive orders on Day One. This stability, even as yields remain at extreme percentiles (92nd-97th), suggests markets had already positioned for the new administration’s policies. The muted reaction may reflect confidence that Trump’s pro-business agenda will offset potential disruptions from immigration and trade policies.

Credit Pulse

Credit markets embraced risk during inauguration week, with high-yield spreads compressing to an extreme 9th percentile—the tightest levels in five years. This compression, coupled with the VIX falling to the 18th percentile, reveals profound market optimism about Trump’s business-friendly agenda. Investment-grade spreads holding steady at tight levels further confirms credit investors’ confidence that deregulation and potential tax cuts will boost corporate profitability despite trade policy uncertainties.

Federal Reserve Policy Outlook

The Federal Reserve finds itself in an increasingly complex position as Trump’s policy agenda unfolds. Markets have fully priced in a pause at the January 28-29 FOMC meeting, with fed funds futures showing virtually no chance of any policy action. The combination of still-elevated inflation, economic resilience, and uncertainty about the new administration’s fiscal and trade policies creates a compelling case for the Fed to maintain its wait-and-see approach.

Chair Powell faces the delicate challenge of maintaining Fed independence while navigating an administration that has historically been vocal about monetary policy preferences. The central bank must assess whether Trump’s policies will prove inflationary (through tariffs and fiscal expansion) or disinflationary (through increased productivity and labor supply changes). Markets have scaled back 2025 rate cut expectations dramatically, now pricing just 50 basis points of easing compared to 100 basis points expected weeks ago.

Week Ahead: Fed Meeting and Policy Clarity

• FOMC meeting (Jan 28-29): The Fed is expected to hold rates steady and likely maintain a cautious tone about future policy moves. Powell’s press conference will be scrutinized for any hints about how the Fed views Trump’s policy agenda.
• Trump’s first full week: Markets will watch for additional executive orders and clarification on trade policy timelines, particularly regarding the threatened February 1 tariffs on Canada and Mexico.
• Q4 GDP (Jan 30): Fourth quarter growth data will provide a baseline for assessing the economy’s momentum entering the Trump era. Consensus expects solid 2.7% annualized growth.
• Corporate earnings season: Major tech earnings will test market optimism, with particular focus on companies exposed to global supply chains and potential trade disruptions.

US Economic Positioning and Global Context

Trump’s inauguration week highlighted the unique position of the US economy—strong enough to weather policy uncertainty yet vulnerable to self-inflicted disruptions. The administration inherits an economy with 4% unemployment, moderating inflation, and solid growth momentum. This strength provides cushion for policy experiments but also reduces the economic case for dramatic interventions.

Policy collision course: The tension between Trump’s various policy goals is becoming apparent. Aggressive immigration enforcement could tighten labor markets and fuel wage inflation, complicating the Fed’s job. Trade restrictions could boost inflation while hurting growth. Yet tax cuts and deregulation could provide offsetting stimulus. Markets are betting the pro-growth policies dominate, but execution risks loom large as the administration’s ambitious agenda meets economic and political realities.