Duration & Credit Pulse
Executive Summary
Bottom Line: The Supreme Court's 6-3 IEEPA tariffs ruling on February 20 was the week's defining event, yet the paradoxical market response — Treasury yields rising despite tariff removal — illustrated the fiscal channel's dominance over the inflation channel in current market pricing. Hawkish FOMC minutes released February 18 compressed rate-cut expectations and drove a bear flattening, with the 2-year yield leading the move higher at +7 basis points while the 30-year added only 3 basis points, narrowing the 2s10s spread to +61 basis points. Credit markets diverged from rates, with high yield spreads tightening 9 basis points to 248 basis points as reduced trade-war uncertainty outweighed the stagflationary Q4 GDP and core PCE data released Friday morning.
Duration Dashboard
| Maturity | February 13, 2026 | February 20, 2026 | Weekly Δ | 5-Year Percentile |
|---|---|---|---|---|
| 2‑Year | 3.41% | 3.48% | +7 bp | 32.59th %ile (middle range) |
| 5‑Year | 3.61% | 3.65% | +4 bp | 40.62th %ile (middle range) |
| 10‑Year | 4.05% | 4.09% | +4 bp | 58.50th %ile (middle range) |
| 30‑Year | 4.70% | 4.73% | +3 bp | 81.19th %ile (elevated) |
Bear Flattening: Short-End Pressure from Hawkish FOMC Minutes
Curve Analysis: Treasury markets bear flattened over the four-day Presidents' Day week, with the 2-year yield rising 7 basis points to 3.48% while the 30-year added only 3 basis points to 4.73%. The 2s10s spread narrowed from +64 basis points to +61 basis points, reflecting the front end's heightened sensitivity to Federal Reserve rate expectations. Hawkish FOMC minutes released February 18 drove short-term repricing, while the long end's more modest move reflects partial offsets: the SCOTUS tariff ruling removed some inflation risk premium, but fiscal deficit concerns from the loss of tariff revenue capped any meaningful long-end rally. The 30-year at 4.73% (81.19th historical percentile) continues to reflect elevated term premium relative to the 2-year (32.59th percentile), consistent with a market pricing meaningful long-run fiscal uncertainty.
The week's Treasury dynamics illustrate a policy paradox that fixed income markets are working through in real time. The Supreme Court's IEEPA ruling, on its face, should have been disinflationary — removing broad tariffs reduces import prices and relieves consumer cost pressures. Yet yields rose across the curve, driven by two competing forces. First, the FOMC minutes released two days earlier had already repriced rate expectations toward a more restrictive path, anchoring the 2-year yield at higher levels. Second, the fiscal arithmetic of the SCOTUS ruling — invalidating a significant revenue source against a CBO February baseline projecting federal debt at 120% of GDP by 2036 and annual interest costs rising from $970 billion to $2.1 trillion — reinforced term premium at the long end despite reduced inflation expectations. As we discussed in our February 1 analysis of the Warsh nomination, the intersection of monetary policy uncertainty and fiscal trajectory creates a challenging backdrop for duration positioning.
The 30-year TIPS auction on February 19 added to this picture, clearing at a real yield of 2.47% — the second-highest level since the 30-year TIPS was reintroduced in 2010 — with a bid-to-cover ratio of 2.75. That result suggests institutional demand for inflation protection at long maturities remains solid, a reasonable posture given the core PCE data released Friday. The prior week's 20-year nominal auction was comparatively softer with a two-basis-point tail, indicating that nominal duration demand at the long end is more selective than real yield demand — consistent with an environment where inflation expectations remain somewhat elevated even if directionally uncertain.
Credit Pulse
| Metric | February 13, 2026 | February 20, 2026 | Weekly Δ | 5-Year Percentile |
|---|---|---|---|---|
| IG OAS | 75 bp | 72 bp | −3 bp | 12.85th %ile (extremely tight) |
| HY OAS | 257 bp | 248 bp | −9 bp | 9.79th %ile (extremely tight) |
| VIX Index | 20.60 | 19.09 | −1.51 | 60.42th %ile (middle range) |
Credit markets delivered a notably different read than the rates market this week, with investment grade and high yield spreads tightening as the SCOTUS tariff ruling reduced a layer of policy uncertainty that had been priced into corporate risk premiums. High yield spreads narrowed 9 basis points to 248 basis points — now sitting at the 9.79th percentile of the five-year historical distribution, reflecting historically tight valuations — while investment grade compressed 3 basis points to 72 basis points at the 12.85th percentile. The VIX declined from 20.60 to 19.09, consistent with the reduction in tail risk associated with open-ended trade conflict. In our February 8 report, we noted that investment grade issuance conditions remained favorable at then-prevailing spread levels; the additional tightening this week further supports robust primary market activity, with Goldman Sachs having raised its full-year 2026 investment grade issuance forecast to $2.1 trillion on the back of AI-driven technology capital needs.
US Macroeconomic Assessment – Stagflationary Q4 GDP and Core PCE Meet SCOTUS IEEPA Tariffs Ruling
The week of February 17–20 produced an unusually dense sequence of market-relevant information in a four-day trading week. The combination of FOMC minutes, major economic data, a Supreme Court ruling on tariff authority, and a developing Middle East geopolitical situation created an environment where no single narrative fully dominated, though the cumulative message for fixed income investors was consistent: the Federal Reserve's path to rate normalization is more complicated than market pricing suggested entering the year.
GDP and PCE confirm the stagflationary read: Friday's simultaneous release of the Q4 2025 GDP advance estimate and the December core PCE deflator crystallized the policy challenge. Real GDP grew at 1.4% annualized, well below the 2.8%–3.0% consensus, with the Bureau of Economic Analysis attributing roughly one percentage point of the shortfall to the drag from the 43-day government shutdown that extended into late 2025. Even adjusting for that factor, underlying growth showed a meaningful step down from Q3's 4.4% pace. The December core PCE reading of 3.0% year-over-year and 0.4% month-over-month — the sharpest monthly increase in approximately twelve months — simultaneously signaled that progress toward the Fed's 2% inflation target has stalled. Growth decelerating while inflation re-accelerates is precisely the stagflationary configuration that monetary policy cannot easily address through conventional rate adjustments.
High-frequency data presented a more resilient picture near-term: Initial jobless claims for the week ending February 14 came in at 206,000, the lowest reading since November 2025, indicating continued labor market strength despite the broader growth slowdown. The Philadelphia Fed manufacturing index jumped to 16.3 in February, a five-month high well above the 7.5–8.5 consensus range, pointing to improving regional industrial conditions. January industrial production rose 0.7% against a 0.3% consensus estimate — the strongest monthly reading in approximately one year. December housing starts, released on a delayed basis, came in at 1.404 million annualized, a 6.2% increase that exceeded the 1.31 million estimate. The preliminary February S&P Global PMI surveys offered a modest offsetting signal: the composite index fell to a 10-month low as the services reading of 52.3 and manufacturing at 51.2 both trailed their January levels, suggesting some softening in activity expectations even as the hard data remained solid. February University of Michigan sentiment (56.6 versus the 57.2 consensus) similarly pointed to ongoing consumer caution. These readings are collectively consistent with a near-term soft landing, but they also suggest demand remains firm enough to sustain the inflationary pressures visible in the PCE data.
Middle East escalation adds an energy risk channel: The developing confrontation between the United States and Iran introduced a geopolitical risk premium into energy markets, with WTI crude trading near $66.50–$67 per barrel as news emerged of a significant US military buildup in the region. President Trump's statements on February 19–20 regarding potential military options, combined with Iran-Russia joint naval exercises in the Strait of Hormuz — which handles approximately 20% of global crude oil transits — created an upside risk to energy prices that could complicate the inflation picture further. The Middle East situation was not the primary driver of fixed income moves this week, but it represents a meaningful tail risk to an inflation outlook that is already challenging for the Fed.
Federal Reserve Policy Outlook: FOMC Minutes February 2026 Shift Rate Expectations
The FOMC minutes from the January 27–28 meeting — released February 18 and now the most consequential Fed communication of the young year — shifted market pricing in a meaningful and durable way. The revelation that "several participants" had discussed the conditions under which a rate increase might be warranted represents a qualitative change in the internal policy debate, even if it does not yet reflect a formal Committee majority view. The 10-2 vote to hold rates at 3.50%–3.75% (with the two dissents favoring a cut, not a hike) confirmed that tightening is not imminent, but the hike discussion's presence in the minutes set a higher bar for any near-term easing and introduced a tail scenario that had not been meaningfully priced before.
Implied rate cut expectations compressed sharply on the week. Probability of a March move fell to single digits, and the June meeting became the earliest point where markets assign materially better-than-even odds for easing. Full-year 2026 implied easing narrowed to approximately 50–64 basis points — down from the 75–100 basis points expected entering the year. The subsequent Friday release of weak GDP alongside re-accelerating core PCE reinforced the minutes' message: the Committee faces a policy environment where neither cutting (inflation too persistent) nor hiking aggressively (growth too fragile) offers a clean solution.
The leadership transition adds a structural layer of uncertainty to policy pricing. Kevin Warsh's pending Senate confirmation to replace Chairman Powell — whose term expires in May — introduces the possibility of meaningful shifts in the Fed's reaction function and communication style. The January minutes' hawkish tone may in part reflect the current Committee establishing a policy baseline before the transition, or it may reflect genuine concern that the last phase of inflation normalization will prove more difficult than the 2024–2025 disinflation period suggested. Either way, investors pricing 2026 and 2027 rate paths are effectively pricing two different committees — a source of uncertainty that argues for elevated term premium.
Week Ahead: Key Events – February 23 Onward
- Personal Income and Spending (February 27): January personal spending data will provide the first direct read on consumer activity in Q1 2026. Against the backdrop of stagflationary Q4 data, the spending component will be watched for signs that consumers are adjusting behavior in response to persistent price pressures and the SCOTUS tariff ruling's near-term uncertainty.
- ISM Manufacturing PMI (March 2): Following the stronger Philadelphia Fed print, the national manufacturing survey will test whether the improvement reflects broader industrial momentum. The prices-paid sub-index carries added weight given the current inflation dynamics, and any acceleration there would reinforce the FOMC's cautious posture.
- Warsh Confirmation Hearings: Senate proceedings on Kevin Warsh's nomination as Fed Chair will be closely watched for signals about incoming monetary policy priorities, tolerance for above-target inflation, and the incoming chair's views on Fed independence within the current political environment.
- Treasury Auctions: The upcoming 2-year and 5-year auction sequence will test demand at the front end following the hawkish FOMC minutes repricing. Bid-to-cover ratios and tail results will be read as indicators of whether the fiscal concerns from the SCOTUS tariff ruling have begun to affect foreign appetite for US duration.
- Section 122 Tariff Guidance: Administrative details on the scope, exemptions, and implementation timeline of the replacement import surcharge will be closely monitored. Section 122's 150-day statutory limit creates a defined congressional deadline, and early guidance on the administration's legislative strategy will influence how markets price the medium-term trade policy environment.
US Economic Positioning and Global Context
The SCOTUS IEEPA ruling's global implications extend beyond near-term tariff levels. By constraining the executive's unilateral trade authority, the decision shifts any comprehensive long-term tariff structure toward the legislative process — a slower and more uncertain path that reduces but does not eliminate trade policy risk for global investors and trading partners. The DXY dollar index gained approximately 0.8% on the week to 97.73, somewhat counterintuitively, as capital flows responded to the higher short-term US yield advantage relative to a Europe where the ECB recently reduced rates to 2.5% and a China pursuing comprehensive stimulus measures. Dollar strength alongside a stagflationary domestic data profile creates a complex environment for US multinationals, whose earnings are affected by both demand conditions and exchange rate translation. For emerging market fixed income, the combination of dollar strength and volatile US policy creates additional headwinds, as higher US yields and dollar appreciation increase the cost of dollar-denominated EM debt service.
On the European front, Ukraine-Russia ceasefire discussions held in Geneva on February 17–18 ended without a substantive breakthrough, with fundamental disagreements on territorial arrangements preventing any agreement. While the absence of a ceasefire resolution was not a direct catalyst for US fixed income moves this week, it maintains a geopolitical backdrop that keeps risk sentiment in a moderately cautious register. Combined with the US-Iran situation discussed in the macro section, the global geopolitical environment argues against the complacency that historically tight credit spreads might otherwise imply. For institutional fixed income investors, the interaction of US fiscal concerns, constrained Fed optionality, elevated geopolitical risk, and historically compressed spread levels argues for a measured approach to incremental duration and credit risk at current market levels.
Key Articles of the Week
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Prior Week's Report: CPI January 2026 – Bull-Flattening Rally Drives 10-Year Treasury to 4.05%Mariemont Capital – Duration & Credit PulseFebruary 15, 2026Read Report →
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Minutes of the Federal Open Market Committee – January 27–28, 2026Board of Governors of the Federal Reserve SystemFebruary 18, 2026Read Article →
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Gross Domestic Product, Fourth Quarter and Year 2025 (Advance Estimate)U.S. Bureau of Economic AnalysisFebruary 20, 2026Read Article →
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Fed Minutes Show Officials Discussed Rate Hikes Amid Persistent InflationCNBCFebruary 18, 2026Read Article →
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Supreme Court Strikes Down Broad IEEPA Tariffs in 6-3 DecisionReutersFebruary 20, 2026Read Article →
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US GDP Slows Sharply in Q4 as Core PCE Holds Above 3% – Stagflation WatchThe Wall Street JournalFebruary 20, 2026Read Article →
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Weekly Jobless Claims Fall to Three-Month Low; Philly Fed Beats EstimatesReutersFebruary 19, 2026Read Article →
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IEEPA Tariff Revenue Loss Could Total $1.4 Trillion Over Decade, Analysis FindsTax FoundationFebruary 20, 2026Read Article →
Frequently Asked Questions
What did the Supreme Court rule on IEEPA tariffs in February 2026?
In a 6-3 decision on February 20, 2026, the Supreme Court ruled in Learning Resources Inc. v. Trump that the administration's use of the International Emergency Economic Powers Act to impose broad import tariffs exceeded executive authority. The ruling invalidated approximately $165 billion in annual tariff collections and raised the prospect of significant importer refunds. The administration responded the same day by invoking Section 122 for a temporary 10%–15% import surcharge; Section 232 tariffs on steel, aluminum, autos, semiconductors, and pharmaceuticals remain in place under separate authority.
Why did Treasury yields rise after the Supreme Court struck down IEEPA tariffs?
While removing broad tariffs is disinflationary — which typically supports lower yields — the market's reaction prioritized the fiscal channel over the inflation channel. Eliminating tariff revenue worsens an already-challenging federal deficit trajectory, increasing the supply of Treasury debt needed to fund operations and supporting elevated term premium at the long end. Simultaneously, hawkish FOMC minutes released two days earlier had already repriced rate-cut expectations, driving the 2-year yield higher by 7 basis points and producing the week's bear flattening pattern.
What did the February 2026 FOMC minutes reveal about the interest rate outlook?
The January 27–28 meeting minutes, released February 18, disclosed that "several participants" had discussed the conditions under which a rate increase might be warranted — a notable escalation in hawkish language. The Committee voted 10-2 to hold the federal funds rate at 3.50%–3.75%, with both dissents favoring a cut rather than a hike. The minutes cited "meaningful" upside inflation risks and slower progress toward the 2% target, pushing market-implied odds for a March cut to near zero and shifting the earliest likely easing to June at the earliest.
How does the Q4 2025 GDP and core PCE data affect the Federal Reserve's policy options?
The combination of 1.4% annualized Q4 GDP growth and 3.0% year-over-year core PCE presents the Fed with a classic stagflationary dilemma: growth is slowing enough to argue against hikes, while inflation is persistent enough to argue against cuts. The Bureau of Economic Analysis attributed roughly one percentage point of the GDP miss to the 43-day government shutdown, but even adjusting for that factor, underlying growth decelerated meaningfully from Q3's 4.4% pace. The Fed's most likely path is an extended hold, with the timing of eventual easing increasingly dependent on inflation data rather than growth data.
