Duration Dashboard

The July 2025 jobs report's upside surprise catalyzed a measured Treasury selloff concentrated in the front end, where 2-year yields jumped 13 basis points to 3.88% as markets recalibrated expectations for Federal Reserve easing. The 10-year yield's more modest 7 basis point rise to 4.35% reflected competing dynamics: strong employment data arguing for higher rates versus quarter-end flows and the removal of debt ceiling uncertainty following President Trump's July 4th signing of the One Big Beautiful Bill Act. Trading volumes remained light given the Independence Day holiday, but the curve's bear flattening pattern suggested growing confidence that the Fed would maintain restrictive policy despite two dissenting votes expected at the upcoming July 29-30 FOMC meeting.

Credit Pulse

Credit markets demonstrated remarkable strength during the holiday week, with high yield spreads compressing 22 basis points to 260bp—reaching the 10th percentile of their 5-year range despite rising Treasury yields. Investment grade bonds similarly outperformed, tightening 6 basis points to 74bp as robust primary market activity of $1.45 trillion year-to-date continued attracting strong investor demand. The dichotomy between extremely tight credit spreads and the VIX's modest uptick to 17.48 suggests options markets remain more cautious than credit investors about potential volatility ahead, particularly given ongoing trade policy uncertainty and the approaching FOMC meeting.

Dollar Dynamics – Historic Reversal Begins

The dollar's dramatic round trip—collapsing 10.8% in the first half of 2025 for its worst H1 performance since 1973 before rebounding 3.2% in early July—emerged as the dominant macro force shaping fixed income flows during the holiday week. The greenback's stabilization coincided precisely with the July 2025 jobs report beat, suggesting fundamental correlations are reasserting after six months of seemingly irrational dollar weakness despite restrictive Fed policy. DXY's bounce from 95.40 to 98.50 triggered significant repatriation flows into Treasuries, partially explaining why long-end yields remained contained despite the fiscal explosion and sovereign downgrade.

The dollar's H1 collapse had profound implications barely visible in week-ending levels: foreign central banks reduced Treasury holdings by $142 billion through May, the largest five-month exodus since 2014's taper tantrum. Yet July's reversal suggests this liquidation may be ending, with real money accounts from Europe and Asia returning as buyers above 4.30% on the 10-year. The 3.2% dollar rally in just five trading days marks the sharpest reversal since March 2020, driven by widening rate differentials as the ECB cut while the Fed stood pat. For fixed income investors, dollar trajectory remains the key swing factor—continued strength would support Treasury demand despite fiscal concerns, while renewed weakness could trigger another leg higher in yields as foreign buyers retreat.

Federal Reserve Policy Outlook – July 2025 FOMC Preview

The Federal Reserve enters its July 29-30 FOMC meeting facing an increasingly complex policy calculus, with stronger employment data arguing for patience while persistent inflation and internal dissent create pressure for action. Market pricing indicates only 35% probability of a rate cut at this meeting, though Fed funds futures fully price two 25-basis-point reductions by year-end, most likely at the September and December meetings. The stronger July 2025 jobs report reinforced the majority's cautious stance, though Governors Bowman and Waller's expected dissents for immediate easing highlight growing divisions about the appropriate policy path amid unprecedented fiscal expansion and sovereign credit downgrades.

The Committee must navigate conflicting signals: robust job growth and sticky services inflation argue for maintaining restrictive policy, while manufacturing weakness and trade uncertainty suggest economic headwinds building beneath the surface. The $5 trillion debt ceiling increase and associated fiscal expansion complicate the Fed's inflation outlook, potentially requiring higher terminal rates to offset stimulative fiscal policy. The Moody's downgrade to Aa1—completing the trifecta of major agency downgrades—adds another dimension to the Fed's calculations, as term premium expansion could tighten financial conditions independently of policy rates.

Global policy divergence amplifying dollar flows: The Federal Reserve's relative hawkishness stands in stark contrast to global peers, with the European Central Bank having cut rates to 2.00% on June 5 while maintaining data dependence at their July 24 meeting. This widening policy differential helped catalyze the dollar's 3.2% July rebound after its historic first-half collapse, reinforcing capital flows toward U.S. assets despite fiscal sustainability concerns. Energy markets added another layer of complexity, with Brent crude maintaining a $74 per barrel risk premium following June's Iran-Israel infrastructure attacks. Chair Powell's press conference will likely emphasize data dependence while acknowledging these unusual uncertainties, maintaining optionality for September action depending on incoming inflation prints and any escalation in either trade tensions or Middle East conflicts that could further complicate the policy outlook.

Week Ahead: FOMC Decision Meets Mid-July Data

• CPI Inflation (July 11): June CPI takes on heightened importance as final inflation reading before July FOMC. Core expected at 0.2% monthly, but any upside surprise could cement Fed's hold stance through summer.
• PPI Producer Prices (July 12): June PPI provides crucial insight into pipeline pressures and tariff pass-through effects. Markets watching for signs that partial rollbacks are easing goods inflation.
• Retail Sales (July 16): June retail sales will reveal consumer response to employment strength versus inflation pressures. Consensus expects -0.3% decline after May's surprising strength.
• Industrial Production (July 16): Manufacturing sector health check amid ongoing trade uncertainties. Any further weakness could fuel Fed dove arguments for preventive easing.
• Housing Starts (July 17): June housing data critical given mortgage rates hovering near 7.5%. Permits expected to show continued builder caution despite solid employment backdrop.