Duration Dashboard

Treasury markets staged their most significant rally since March as economic weakness trumped inflation concerns. The catalyst came from Thursday's shocking ADP employment report showing just 37,000 jobs added—far below any economist estimate—which immediately drove aggressive buying across the curve. While Friday's official payrolls at 139,000 beat lowered expectations, massive downward revisions totaling 95,000 jobs for prior months confirmed the labor market's rapid deterioration. The 5-year yield's 12 basis point decline reflected recalibration of Fed expectations, with markets now pricing potential easing by year-end despite the central bank maintaining its 4.25-4.50% stance.

Credit Pulse

Credit markets demonstrated remarkable resilience, with spreads grinding tighter despite mounting economic headwinds. Investment grade spreads compressed 3 basis points to 83bp, maintaining position at just the 16th percentile of the 5-year range. High yield proved even more robust, tightening 12 basis points to 306bp—sitting at an extreme 15th percentile that suggests dangerous complacency. The sharp contrast between credit strength and equity volatility became evident as VIX plunged 3.72 points to 18.57, returning to median levels after briefly touching panic territory. This divergence reflects credit investors' focus on still-solid corporate fundamentals and attractive all-in yields rather than macro uncertainty.

Fund Flows & Positioning

Fixed income fund flows revealed a stark dichotomy between duration aversion and credit appetite that defined the week's market action. The hemorrhaging from Treasury ETFs reached crisis proportions, with TLT suffering $822 million in outflows over five days and $2.93 billion for the month—pushing the fund to 52-week lows despite falling yields. This capitulation in duration exposure occurred even as Treasury yields rallied, suggesting investors have fundamentally lost faith in government bonds as portfolio ballast. The selling appeared indiscriminate, hitting both short and long duration funds equally.

The rotation into credit products reached euphoric levels, with high yield bond funds attracting their largest inflows in 43 weeks just as spreads compressed to historic tights. This aggressive reach for yield—buying HY at the 15th percentile of spreads while employment collapses—epitomizes late-cycle behavior where return-chasing overwhelms risk assessment. Bank loan funds seeing 12-week high inflows reflects hedging against potential Fed pivots, while municipal bonds' nine-week inflow streak demonstrates persistent demand for tax-advantaged income. The divergence between massive Treasury outflows and selective credit inflows suggests investors are making a dangerous bet: that corporate bonds can weather economic storms better than government securities.

Federal Reserve Policy Outlook

The Federal Reserve finds itself trapped between accelerating economic weakness and still-elevated inflation, with this week's data making their June 18 meeting increasingly pivotal. The shocking employment reports—37,000 ADP and heavily revised NFP data—would typically trigger immediate easing discussions, but 2.8% core inflation remains uncomfortably above target. Market pricing shifted dramatically during the week, with December rate cut odds rising from 40% to 65% as participants bet that labor market deterioration would force the Fed's hand regardless of inflation concerns.

The legal challenge to IEEPA tariffs adds another complication to the Fed's calculus. Should the appeals court ultimately strike down the tariffs, the disinflationary impulse from lower import prices could provide cover for earlier easing. Conversely, if tariffs survive legal scrutiny or new ones are implemented—Trump's May 23 threat of 50% EU tariffs looms large—the Fed may need to maintain its hawkish stance despite economic weakness. Fed officials remained notably silent during the week, but the Summary of Economic Projections at the June meeting will likely show significant downward revisions to growth forecasts while maintaining an uncomfortable upward bias to inflation projections, epitomizing their policy dilemma.

Week Ahead: Data Tests Fed's Resolve

• Retail Sales (June 14): May data becomes critical test of consumer resilience. Consensus expects modest 0.3% gain, but ADP weakness suggests downside risk as employment concerns curtail spending.
• PPI Inflation (June 13): Producer prices offer early read on June inflation trajectory. Any acceleration would complicate Fed's ability to respond to weakening growth.
• FOMC Meeting (June 17-18): Most important Fed meeting of 2025 as Committee must balance deteriorating labor market against persistent inflation. Dot plot revisions closely watched.
• Empire & Philly Fed (June 17 & 20): Regional manufacturing surveys provide real-time pulse on factory sector. Further deterioration would confirm recession risks spreading.
• Housing Starts (June 18): April construction data tests whether housing can stabilize after March collapse. Mortgage rate sensitivity remains key variable.

US Economic Positioning and Global Context

The United States economy stands at a critical inflection point where traditional relationships have broken down: bad employment news drove bond rallies while credit spreads tightened, inflation remained contained despite tariffs, and the dollar weakened against a backdrop of legal challenges to trade policy. This week crystallized the new regime of unpredictable correlations and policy uncertainty that defines the 2025 landscape. The disconnect between asset classes—Treasury yields plunging while credit spreads grind tighter—suggests markets are selectively interpreting data to support predetermined narratives rather than holistically assessing risks.

Global central banks diverge as US policy paralysis deepens: While the Fed remained frozen, global peers acted decisively. The ECB's 25 basis point cut accompanied by hawkish forward guidance reflected Europe's delicate balance between supporting growth and maintaining credibility. The Bank of Japan's continued tightening bias amid accelerating inflation marked a historic policy reversal. China's measured stimulus despite trade tensions suggested Beijing was playing a longer game, avoiding aggressive moves that might escalate confrontation. For fixed income investors, this week marked a potential turning point: the combination of shocking labor market weakness and benign inflation created perfect conditions for a tactical Treasury rally, even from elevated levels. Yet credit markets' refusal to acknowledge growing risks—spreads at 15-16th percentile despite mounting evidence of economic deterioration—suggests the next repricing may come from spread widening rather than further rate declines. As legal challenges to tariffs wind through courts and economic data continues deteriorating, the stage is set for heightened volatility in the weeks ahead.