Duration Dashboard

The Treasury market's violent rally during the week reflected a classic flight-to-quality dynamic as risk assets sold off sharply. Bloomberg reported it as the "biggest Treasury market rally since July," with the 10-year yield touching 4.27% intraday on February 27 before closing the week at 4.21%. The move gained additional momentum from exceptionally strong auction results, with all three Treasury auctions clearing below market yields with elevated bid-to-cover ratios. Foreign demand proved particularly robust, suggesting international investors sought dollar assets ahead of potential trade disruptions. However, the late-week reversal following Trump's EU tariff announcement presaged a more challenging March for duration positions.

Credit Pulse

Credit markets experienced their first meaningful widening episode of 2025 as spreads abandoned historic tights. Investment grade spreads widened 5 basis points to 83bp, moving from the 12th to 19th percentile—still tight by historical standards but clearly reversing trend. High yield proved more vulnerable, widening 14 basis points to 294bp as risk-off sentiment accelerated. The moves, while modest in absolute terms, marked a psychological shift: after months of relentless compression driven by reaching for yield, investors finally acknowledged that spreads offered inadequate compensation for mounting risks. Sector dispersion increased markedly with transportation, chemicals, and media underperforming while defensive names in healthcare and utilities outperformed.

Federal Reserve Policy Outlook

The Federal Reserve entered March in an increasingly untenable position, with Vice Chair for Supervision Michael Barr's resignation on February 28 adding leadership uncertainty to policy paralysis. Core PCE inflation at 2.6% annually—and accelerating on a three-month basis—eliminated any near-term possibility of rate cuts, while deteriorating growth indicators argued against further tightening. This stagflationary bind left the Fed hoping that maintaining rates at 4.25%-4.50% would somehow thread the needle between controlling inflation and avoiding recession.

Market pricing reflected growing skepticism about the Fed's ability to navigate these crosscurrents. Fed funds futures showed just 60 basis points of cuts priced for all of 2025, down from over 100 basis points in January, with the first cut pushed to June at the earliest. More concerning, the eurodollar curve began pricing rate hikes for 2026 as markets recognized that tariff-driven inflation might force the Fed's hand. The central bank's quantitative tightening program, set to slow from $25 billion to just $5 billion monthly at the March meeting, represented the only certainty in an otherwise fluid policy environment. Barr's departure, while removing a regulatory hawk, added another variable to an already complex equation.

Week Ahead: Critical Data Tests Stagflation Thesis

• ISM Services (March 3): February services data takes on heightened importance given manufacturing weakness. Consensus expects modest deceleration to 52.5, but employment and prices paid components will be scrutinized for wage-price spiral evidence.
• Powell Testimony (March 7-8): Semi-annual Humphrey-Hawkins testimony before House and Senate provides first post-tariff Fed communication. Markets desperate for clarity on how trade policy affects the reaction function.
• February Employment Report (March 8): Nonfarm payrolls expected at +160K with unemployment at 4.2%. Wage growth the key variable—acceleration above 4.0% would cement "higher for longer" narrative.
• ECB Meeting (March 7): European response to US tariffs crucial for dollar and global growth outlook. Aggressive ECB easing could exacerbate currency wars.
• Treasury Refunding Details: Quarterly refunding announcement will reveal funding needs amid expanding deficits. Any surprises in issuance could pressure the rally.

US Economic Positioning and Global Context

The United States stands at a critical inflection point where domestic policy choices threaten to undermine the very foundations of post-war economic order. The combination of massive fiscal deficits (approaching 7% of GDP), protectionist trade policies, and a constrained central bank creates a policy trilemma with no good solutions. Traditional economic relationships continue breaking down: the Phillips Curve has re-steepened after years of dormancy, the dollar strengthens despite deteriorating fundamentals, and bonds no longer provide reliable portfolio protection during equity selloffs.

Global reverberations accelerate: European markets face an impossible choice between retaliating against US tariffs—risking further escalation—or accepting economic damage that could tip the region into recession. China's measured response thus far, focusing on targeted agricultural and energy exports rather than massive Treasury selling, suggests Beijing is playing a longer game. But patience has limits, and the risk of a disorderly adjustment in currency and bond markets grows with each escalation. For fixed income investors, the week marked a regime change from the benign environment of early 2025 to one dominated by stagflation risks, policy uncertainty, and credit spread normalization. The Treasury rally, impressive as it was, likely marks the last hurrah before inflation concerns reassert themselves. Credit markets, having finally acknowledged that historic tight spreads were unsustainable, face a grinding widening process that typically unfolds over quarters, not weeks. In this new paradigm, preservation of capital supersedes reaching for yield.