Duration & Credit Pulse: March 23, 2025

Duration & Credit Pulse – Week Ending March 23, 2025 | Mariemont Capital

Duration & Credit Pulse

Week Ending March 23, 2025

Executive Summary

Bottom Line: The historic Bank of Japan pivot ending negative rates combined with Fed patience on policy created unprecedented global monetary divergence, sending Treasury yields lower across the curve while credit markets remained remarkably resilient. The 10-year yield fell 6.6 basis points to 4.25% as recession fears intensified, yet corporate bond issuance surged past $200 billion for March—highlighting the paradox of strong technical demand amid deteriorating economic fundamentals that defines today’s fixed income landscape.

Duration Dashboard

Maturity	March 16, 2025	March 23, 2025	Weekly Δ	5-Year Percentile
2‑Year	4.02%	3.95%	-7 bp	34th %ile (middle range)
5‑Year	4.09%	4.00%	-9 bp	54th %ile (middle range)
10‑Year	4.31%	4.25%	-7 bp	73rd %ile (elevated)
30‑Year	4.62%	4.59%	-3 bp	85th %ile (extreme)

Bull Flattening Amid Global Policy Divergence

Curve Analysis: Treasury markets exhibited classic bull flattening dynamics as recession concerns drove aggressive buying in the belly of the curve. The 5-year yield led the decline, falling 9 basis points to 4.00%—its sharpest weekly drop since early February. The 2s30s spread compressed to 64 basis points from 60bp, reflecting growing skepticism about the Fed’s ability to maintain restrictive policy amid slowing growth. Notably, shorter maturities outperformed despite the Fed’s hawkish hold, suggesting markets are pricing in policy error risks. The 10-year’s persistence above 4.25% despite the rally underscores lingering inflation concerns from tariff impacts.

Treasury markets navigated extraordinary crosscurrents during the week, with the Federal Reserve’s decision to slow quantitative tightening providing technical support even as officials maintained their cautious stance on rate cuts. The reduction in monthly Treasury redemptions from $25 billion to just $5 billion starting April 1 represents a significant shift in balance sheet policy, effectively increasing duration demand by $20 billion monthly. This technical factor, combined with convexity buying from mortgage portfolios and growing recession fears, overwhelmed any hawkish implications from the dot plot maintaining just two cuts for 2025.

Global Policy Divergence Reaches Historic Extremes: The Bank of Japan’s abandonment of negative rates after eight years created the starkest global monetary policy divergence in modern history. While the BOJ finally normalized from -0.1% to a 0-0.1% range, the Fed funds rate sits at 4.25%-4.50%—a 425+ basis point differential that’s reshaping global capital flows. Japanese 10-year yields touching 16-year highs at 1.53% suddenly makes JGBs competitive with Treasuries on a hedged basis for the first time since 2007. This seismic shift in the world’s largest creditor nation’s yield structure has profound implications for Treasury demand, especially as foreign holdings already sit at post-2020 lows.

Credit Pulse

Metric	March 16, 2025	March 23, 2025	Weekly Δ	5-Year Percentile
IG OAS	88 bp	86 bp	-2 bp	26th %ile (tight)
HY OAS	328 bp	327 bp	-1 bp	22nd %ile (very tight)
VIX Index	21.77	19.28	-2.49	58th %ile (moderate)

Credit markets demonstrated remarkable resilience despite mounting economic headwinds, with investment grade spreads tightening 2 basis points to 86bp while maintaining their position in the tightest quartile of the five-year range. The paradox of robust primary market activity—March issuance exceeded $200 billion—amid deteriorating fundamentals reflects the powerful technical bid from yield-starved investors. High yield’s minimal 1bp tightening to 327bp masks significant dispersion beneath the surface, with transportation and media sectors widening sharply while defensive names in healthcare and utilities saw meaningful compression.

Credit Complacency Reaches Dangerous Extremes: With high yield spreads at just the 22nd percentile and investment grade at the 26th percentile of their five-year ranges, credit markets are priced for perfection just as cracks emerge in the foundation. The $585 billion in Q1 investment grade issuance—a record pace—has been absorbed solely due to attractive all-in yields, not spread compensation. When 10-year Treasury yields inevitably break below 4% on recession fears, the arithmetic becomes brutal: a 100bp spread widening would generate -7% excess returns in IG and -15% in HY. The last time spreads were this tight relative to slowing growth was Q4 2007.

US Macroeconomic Assessment – Stagflation Fears Dominate Fed Thinking

The week of March 17-23 crystallized the Federal Reserve’s policy dilemma as officials attempted to balance persistent inflation pressures against increasingly evident growth concerns. The FOMC’s decision to maintain rates at 4.25%-4.50% surprised no one, but the accompanying communications revealed deep uncertainty about the path forward. Chair Powell’s acknowledgment that tariffs have “delayed progress” on inflation while simultaneously lowering growth projections painted a stagflationary picture that offers no good policy options.

Fed trapped between inflation and recession: The updated Summary of Economic Projections told the story of an economy losing momentum while price pressures persist. GDP growth projections fell to 1.7% from 2.1% for 2025, while core PCE inflation expectations rose to 2.8% from 2.5%—the textbook definition of stagflation. The dot plot’s maintenance of two rate cuts for 2025 appears increasingly aspirational given Powell’s emphasis on needing to “separate non-tariff inflation from tariff inflation” before easing. Markets initially whipsawed on the mixed signals but ultimately focused on the growth downgrades, driving Treasury yields lower across the curve.

Balance sheet pivot provides technical support: The Fed’s decision to dramatically slow quantitative tightening represents a significant policy shift that received insufficient attention amid the rate debate. Reducing the monthly cap on Treasury redemptions from $25 billion to just $5 billion effectively puts $20 billion of additional duration demand into the market monthly—equivalent to a stealth QE program. Governor Waller’s dissent from this decision underscored internal divisions about whether the Fed is inadvertently easing policy through the back door while maintaining a hawkish front door stance on rates.

Consumer confidence plummets as reality sets in: While not released during the week, market participants anxiously await the March consumer confidence data after February’s shocking decline to eight-month lows. The University of Michigan’s preliminary March reading showing inflation expectations surging to 3.3% for the year ahead suggests households are beginning to feel the tariff bite. Retail sales data expected in early April will provide the first clean read on whether consumption can withstand the one-two punch of higher prices and economic uncertainty. Early corporate guidance suggests consumer discretionary spending is already moderating.

Federal Reserve Policy Outlook

The Federal Reserve exits its March meeting in an increasingly untenable position, attempting to thread the needle between inflation vigilance and growth support with blunt policy tools ill-suited for supply-side shocks. The Committee’s economic projections reveal the bind: unemployment rising to 4.4% by year-end while inflation remains stubbornly above target at 2.8%. This combination historically triggers aggressive easing, yet the Fed’s hands are tied by inflation dynamics it cannot control through demand management.

Market pricing has converged toward the Fed’s view of just two cuts in 2025, with the first not expected until June at the earliest. More concerning for risk assets, the eurodollar curve has begun pricing rate hikes for 2026 as markets grapple with the possibility that tariff-driven inflation becomes embedded in wage-price dynamics. The technical impact of slowing QT provides some offset, but at just $5 billion monthly in Treasury redemptions, the Fed has minimal additional ammunition should conditions deteriorate rapidly. Powell’s press conference emphasis on “patience” and “data dependence” offered cold comfort to markets seeking clarity in an increasingly uncertain world.

Week Ahead: Focus Shifts to Growth Data

Consumer Confidence (March 26): March data takes on heightened importance given February’s collapse. Consensus expects modest improvement to 105, but inflation expectations component remains key given tariff impacts on purchasing power.
Q4 GDP Final (March 28): Third estimate expected to confirm 2.4% growth, but focus shifts to corporate profits and GDP deflator for inflation signals. Downward revision would amplify growth concerns.
Core PCE Inflation (March 29): February’s inflation data represents last clean read before March tariff impacts. Consensus 0.3% monthly would keep annual rate at 2.8%, well above Fed target.
Chicago PMI (March 29): Regional manufacturing data provides early April insight. Recent weakness in ISM manufacturing suggests continued industrial sector struggles.
Treasury Auctions: Heavy calendar with 2-year, 5-year, and 7-year auctions testing demand amid Fed balance sheet changes. Foreign participation metrics critical given BOJ policy shift.

US Economic Positioning and Global Context

The confluence of Federal Reserve paralysis, Bank of Japan normalization, and European economic weakness creates a uniquely challenging environment for US fixed income markets. The dollar’s 2% surge following the BOJ decision reflects capital flowing to the highest yielder, but this dynamic becomes self-defeating as currency strength amplifies deflationary pressures on traded goods while doing nothing to offset tariff inflation on imports. Traditional correlations continue breaking down: bonds no longer provide reliable equity hedging, credit spreads ignore deteriorating fundamentals, and inflation expectations remain elevated despite slowing growth.

Japan’s pivot changes everything: The BOJ’s exit from negative rates after eight years marks more than a policy normalization—it signals the end of the global liquidity supercycle that suppressed volatility and yields since the financial crisis. With Japanese 10-year yields at 16-year highs and rising, the reflexive bid for Treasuries from yield-starved Japanese institutions faces its first real competition in a generation. Mrs. Watanabe can now earn positive real returns at home for the first time since 2008. Combined with China’s reduced Treasury purchases amid trade tensions, foreign demand—which historically absorbed 40% of issuance—faces structural headwinds just as deficits explode toward $2 trillion. For fixed income investors, the week’s developments reinforce a harsh reality: the era of monetary coordination that suppressed volatility and supported risk assets has definitively ended, replaced by policy divergence that amplifies uncertainty and demands more discriminating security selection.

Key Articles of the Week

Fed decision recap: Powell says tariffs could delay progress on lowering inflation

CNBC

March 19, 2025
Read Article
Fed rate decision March 2025: Fed holds interest rates steady

CNBC

March 19, 2025
Read Article
Bond investors brace for US slowdown, shed risk as Fed seen on hold

Reuters

March 18, 2025
Read Article
Bank of Japan ends the world’s only negative rates regime in historic move

CNBC

March 19, 2025
Read Article
FOMC Minutes, March 18-19, 2025

Federal Reserve

March 19, 2025
Read Article
March 2025 Fed Meeting: Interest Rates Kept Steady, Slower Growth Projected

J.P. Morgan

March 20, 2025
Read Article
Q2 2025 Corporate Bond Market Outlook

Breckinridge Capital Advisors

March 20, 2025
Read Article
March 2025 Market Commentary

Breckinridge Capital Advisors

March 21, 2025
Read Article

March 23, 2025

Duration & Credit Pulse: March 16, 2025

Duration & Credit Pulse – Week Ending March 16, 2025 | Mariemont Capital

Duration & Credit Pulse

Week Ending March 16, 2025

Executive Summary

Bottom Line: Trade war escalation triggered the most severe fixed income volatility of 2025, with credit spreads surging to multi-month highs while Treasury yields whipsawed between 4.16% and 4.33% as flight-to-quality flows battled tariff-driven inflation fears. The S&P 500’s entry into correction territory on March 13 marked a regime shift from complacency to crisis, forcing investors to confront the reality that traditional correlations have broken down in an era of weaponized trade policy and fiscal dominance.

Duration Dashboard

Maturity	March 9, 2025	March 16, 2025	Weekly Δ	5-Year Percentile
2‑Year	4.00%	4.15%	+15 bp	67th %ile (elevated)
5‑Year	4.09%	4.22%	+13 bp	74th %ile (elevated)
10‑Year	4.30%	4.33%	+3 bp	79th %ile (high)
30‑Year	4.60%	4.55%	-5 bp	78th %ile (high)

Curve Flattens Amid Trade War Chaos

Curve Analysis: The Treasury curve exhibited dramatic flattening behavior as front-end yields surged on inflation fears while long bonds paradoxically rallied on recession concerns. The 2s30s spread compressed from 60 basis points to just 40bp—the flattest since December 2024—as markets priced in a toxic combination of near-term inflation and longer-term growth destruction. The 10-year’s relatively modest 3bp increase masked extraordinary intraweek volatility, with the benchmark trading in a 17bp range between 4.16% and 4.33% as haven flows battled inflation concerns. This schizophrenic price action reflects a market struggling to price unprecedented policy uncertainty.

Treasury markets experienced their most chaotic week since the banking crisis of 2023, though end-of-week changes understated the turmoil. The 10-year yield’s journey from 4.30% to an intraweek low of 4.16% on March 13—as stocks entered correction territory—before rebounding to 4.33% captured the market’s inability to find equilibrium. Foreign holdings hit a record $9.05 trillion in March, providing crucial support even as domestic investors fled to cash. The curve’s dramatic flattening, with 2-year yields surging 15bp while 30-years actually declined 5bp, signaled growing recession fears despite near-term inflation pressures.

Flight-to-Quality Meets Inflation Reality: The week crystallized the central paradox of 2025: Treasury bonds can no longer serve their traditional role as unambiguous safe havens when fiscal and trade policies actively stoke inflation. March 12’s price action epitomized this dysfunction—Treasuries initially rallied on cooler CPI data before reversing sharply as traders realized tariffs would overwhelm any organic disinflation. The Markit CDX IG index’s surge to 57-58bp from 51bp marked the largest weekly widening since September 2024, yet Treasuries couldn’t sustain rallies despite clear risk-off sentiment. This breakdown in correlations leaves portfolios dangerously exposed.

Credit Pulse

Metric	March 9, 2025	March 16, 2025	Weekly Δ	5-Year Percentile
IG OAS	85 bp	92 bp	+7 bp	28th %ile (moderate)
HY OAS	300 bp	318 bp	+18 bp	22nd %ile (tight)
VIX Index	23.37	26.84	+3.47	85th %ile (extreme)

Credit markets finally capitulated to reality as investment grade spreads widened 7 basis points to 92bp—still only the 28th percentile historically but the widest levels since December. High yield bore the brunt of selling pressure, surging 18bp to 318bp as the primary market effectively shut down with issuers postponing deals indefinitely. The CDX North American Investment Grade Index experienced its worst week of 2025, widening 6-7bp with March 10’s 4.11bp single-day move marking the sharpest deterioration since September 2024. Dispersion exploded as transportation, retail, and commodity-sensitive names underperformed dramatically.

Credit’s Moment of Truth Arrives: This week’s violent spread widening represents just the opening salvo in what promises to be a sustained repricing of credit risk. With VIX at the 85th percentile while spreads remain historically tight, the asymmetry has become untenable. High yield at 318bp prices in virtually no default risk despite mounting evidence of margin compression from tariffs, slowing growth, and frozen capital markets. The complete shutdown of primary issuance—even Holcim barely squeezed through before conditions deteriorated—signals that the great 2025 refinancing wave faces serious obstacles. Investment grade’s move to 92bp may seem modest, but it’s the velocity that matters: 14bp of widening in two weeks after months of compression suggests the tide has definitively turned.

US Macroeconomic Assessment – Trade War Reality Shock

The week of March 10-16, 2025 will be remembered as the moment abstract trade war threats transformed into concrete economic damage, fundamentally altering the trajectory of the US economy. China’s March 10 implementation of retaliatory tariffs on US agricultural exports, followed by Canada’s March 13 imposition of 25% duties on $29.8 billion of American products, created immediate disruptions that reverberated through supply chains and financial markets. The psychological impact proved even more devastating than the direct economic effects, as evidenced by consumer sentiment’s collapse to 57.9—the lowest reading since the depths of the 2022 inflation crisis.

Labor market shows first cracks despite headline strength: While weekly jobless claims remained contained at 220,000 versus expectations of 225,000, beneath the surface more troubling dynamics emerged. Continuing claims surged to their highest levels since 2021, suggesting those who lose jobs are finding it increasingly difficult to find new ones. Federal unemployment compensation applications spiked as Department of Government Efficiency layoffs accelerated, adding to private sector caution. The disconnect between still-low initial claims and deteriorating hiring conditions creates a particularly challenging backdrop for Fed policy, as traditional labor market signals lose their reliability.

Inflation data overshadowed by tariff reality: March 12’s CPI report, showing continued moderation in underlying price pressures, should have been cause for celebration. Instead, markets largely ignored the cooler inflation print as traders recognized that backward-looking data had become irrelevant in a world of escalating trade wars. Treasury yields initially fell on the CPI release before reversing sharply as the implications of tariff pass-through became clear. Companies from Walmart to General Motors announced immediate price increases ranging from 10-25% on affected goods, rendering February’s inflation data ancient history.

Consumer confidence collapse signals recession risks: The University of Michigan’s preliminary consumer sentiment plunge to 57.9 from 65.0 represented one of the sharpest monthly declines on record, with the survey’s chief economist noting that “tariff concerns dominated consumer psychology to an unprecedented degree.” Perhaps more alarming, one-year inflation expectations surged despite the benign CPI print, suggesting consumers are already adjusting behavior in anticipation of higher prices. This toxic combination of collapsing confidence and rising inflation expectations creates the preconditions for a self-fulfilling recession as consumers retrench.

Federal Reserve Policy Outlook

The Federal Reserve finds itself trapped in an increasingly impossible position as the March 18-19 FOMC meeting approaches, with trade war escalation having fundamentally altered the policy calculus. Chair Powell’s March 7 acknowledgment that “the path to sustainably returning inflation to our target has been bumpy” now seems quaint compared to the mountain range of volatility markets face. The Committee must somehow craft a message that acknowledges tariff-driven inflation risks without triggering panic about growth, all while maintaining credibility that monetary policy can address supply-side shocks it clearly cannot control.

Market pricing has shifted dramatically, with futures now showing just one rate cut priced for all of 2025, down from three cuts expected just weeks ago. More concerning, the eurodollar curve has begun pricing rate hikes for 2026, suggesting markets believe the Fed may need to combat tariff-driven inflation even at the cost of inducing recession. The updated Summary of Economic Projections on March 19 will likely show sharp upward revisions to inflation forecasts and downward revisions to growth, forcing Powell to explain how the Committee plans to navigate stagflation without the tools to address its root causes. History suggests such attempts at central bank omnipotence rarely end well.

Week Ahead: FOMC Meeting Dominates as Trade Wars Escalate

FOMC Decision (March 18-19): The most consequential Fed meeting in years as Powell must address trade war implications. Markets expect no change to the 4.25-4.50% rate but focus on dot plot revisions and Powell’s characterization of tariff impacts on the dual mandate.
Housing Starts (March 19): February data expected to show sharp deceleration as 7%+ mortgage rates and tariff-driven material costs crush affordability. Permits will signal whether spring building season is effectively cancelled.
Existing Home Sales (March 21): Forecast to drop to 3.9 million annual rate, potentially the lowest since 2010 as the housing market freezes. Median prices may show first year-over-year decline since 2012.
S&P Global PMIs (March 22): March preliminary readings critical for gauging immediate tariff impact. Manufacturing expected to fall below 50 as new orders collapse; services may hold above threshold but margins tell the real story.
Durable Goods Orders (March 25): February orders likely negative as businesses freeze capital investment amid trade uncertainty. Boeing’s production issues add another layer of weakness to already-dire outlook.

US Economic Positioning and Global Context

America’s self-inflicted trade war wounds are rapidly metastasizing into a global economic crisis that threatens to unravel decades of carefully constructed international cooperation. The synchronized retaliation by China and Canada this week—targeting $45 billion in US exports—represents just the opening salvo in what threatens to become a 1930s-style trade collapse. Foreign holdings of Treasuries hit $9.05 trillion even as yields proved unstable, highlighting the bizarre dynamic where global investors have no choice but to fund the very policies destroying international commerce.

Dollar dominance faces its greatest test since Bretton Woods: The week’s events crystallized the inherent contradiction in Trump’s economic agenda: you cannot simultaneously pursue aggressive mercantilism while maintaining reserve currency privileges. China’s decision to settle more commodity trades in yuan, Europe’s acceleration of digital euro development, and BRICS nations’ renewed push for alternative payment systems all reflect growing determination to reduce dollar dependence. For fixed income investors, this tectonic shift implies permanently higher term premiums, reduced foreign demand for Treasuries, and volatile capital flows that amplify market stress. Credit markets’ violent repricing this week may prove just a preview of the dislocations ahead as the global financial architecture fragments. The S&P 500’s entry into correction territory on March 13—down 10.1% from February highs—suggests equity investors have begun to grasp what bond markets have known for weeks: the benign environment of early 2025 is definitively over, replaced by a new regime of heightened uncertainty, broken correlations, and policy-driven volatility that traditional models cannot capture.

Key Articles of the Week

US Credit Risk Gauge Jumps the Most in 6 Months on Growth Fears

Bloomberg

March 10, 2025
Read Article
US Bonds Slip as Tariff Worries Overshadow Cooler Inflation Data

Bloomberg

March 12, 2025
Read Article
Stocks sink with S&P 500 in correction, bonds in demand amid tariff angst

Reuters

March 13, 2025
Read Article
US weekly jobless claims fall amid labor market stability

Reuters

March 13, 2025
Read Article
Consumer sentiment plunges in early March, inflation expectations soar

Axios

March 14, 2025
Read Article
US consumer inflation slows in February; tariffs expected to boost prices

Reuters

March 12, 2025
Read Article
Stock Market News for Mar 10, 2025

Nasdaq

March 10, 2025
Read Article

March 16, 2025

Duration & Credit Pulse: March 9, 2025

Duration & Credit Pulse – Week Ending March 9, 2025 | Mariemont Capital

Duration & Credit Pulse

Week Ending March 9, 2025

Executive Summary

Bottom Line: Tariff implementation on March 4 triggered the most significant fixed income volatility of 2025, with Treasury yields whipsawing between haven demand and inflation fears while credit spreads flashed warning signals. The 10-year yield traded in a dramatic 4.2-4.5% range as markets grappled with competing forces of flight-to-quality flows and tariff-induced inflation concerns, ultimately closing the week at 4.30%—up 9 basis points in classic bear steepening fashion that saw long bonds underperform.

Duration Dashboard

Maturity	March 2, 2025	March 9, 2025	Weekly Δ	5-Year Percentile
2‑Year	3.99%	4.00%	+1 bp	36th %ile (middle range)
5‑Year	4.02%	4.09%	+7 bp	60th %ile (middle range)
10‑Year	4.21%	4.30%	+9 bp	75th %ile (elevated)
30‑Year	4.49%	4.60%	+11 bp	81st %ile (elevated)

Bear Steepening Amid Tariff Turbulence

Curve Analysis: Treasury markets exhibited classic bear steepening behavior as tariff implementation drove inflation expectations higher, with the 2s30s spread widening to 60 basis points from 50bp the prior week. The relatively modest 1bp move in 2-year yields versus 11bp in 30-years revealed market conviction that the Fed would maintain its patient stance despite building inflationary pressures. Intraweek volatility far exceeded end-of-week changes, with the 10-year touching 4.50% during peak tariff anxiety before recovering on strong foreign demand and flight-to-quality flows.

The implementation of sweeping tariffs on March 4—25% on Canadian and Mexican goods, 20% on Chinese imports—sent shockwaves through Treasury markets that belied the relatively modest weekly changes. While the 10-year yield ended the week up just 9 basis points at 4.30%, intraday swings exceeded 30bp as traders wrestled with competing narratives of growth destruction versus embedded inflation. The curve’s bear steepening dynamic reflected growing consensus that tariffs represent a stagflationary impulse the Fed cannot easily counter, with long-end yields bearing the brunt of inflation risk premium repricing.

Tariff Reality Hits Different Than Theory: Markets discovered this week that actual tariff implementation carries far greater psychological impact than mere threats. The S&P 500’s 1.8% plunge on March 3 ahead of implementation triggered massive Treasury inflows that initially drove yields lower, but as details emerged of immediate price hikes across consumer goods, inflation fears overwhelmed haven demand. The 30-year bond’s approach to 5% during intraweek trading marked a psychological inflection point—forcing institutional allocators to reconsider duration risk in a world where fiscal dominance and trade wars create permanent inflation volatility.

Credit Pulse

Metric	March 2, 2025	March 9, 2025	Weekly Δ	5-Year Percentile
IG OAS	83 bp	85 bp	+2 bp	19th %ile (very tight)
HY OAS	294 bp	300 bp	+6 bp	13th %ile (extremely tight)
VIX Index	19.63	23.37	+3.74	77th %ile (elevated)

Credit markets flashed warning signals even as spreads remained at historically tight levels, with high yield widening 6bp to 300bp while maintaining its position at just the 13th percentile of its 5-year range. The disconnect between still-compressed spreads and surging volatility—VIX jumped to 23.37, its 77th percentile—suggests credit investors remain dangerously complacent about tariff impacts on corporate profitability. Reports indicated high yield spreads briefly touched 400bp during Tuesday’s panic before compression buyers emerged, viewing the selloff as premature given still-solid fundamentals.

Credit’s Tariff Blind Spot: The modest 6bp widening in high yield spreads grossly understates the fundamental repricing required for a tariff-shocked economy. With spreads still at the 13th percentile despite VIX surging to the 77th percentile, credit markets exhibit extreme cognitive dissonance. Companies with significant international supply chains face margin compression that current spreads simply don’t reflect. The last time we saw similar VIX/spread divergence was February 2020—weeks before credit markets collapsed. Investment grade’s 85bp spread offers virtually no cushion for the earnings disappointments that tariff pass-through will inevitably create.

US Macroeconomic Assessment – Tariffs Transform the Landscape

The week of March 3-9 marked a watershed moment as trade policy shifted from threat to reality, fundamentally altering the US economic trajectory. Monday’s confirmation that tariffs would proceed as scheduled—despite last-minute diplomatic efforts—triggered immediate real-world consequences that revealed how deeply integrated global supply chains had become. The 25% levies on Canadian and Mexican imports not qualifying for USMCA treatment, alongside 20% tariffs on Chinese goods, created instant price pressures that rippled through financial markets and corporate boardrooms alike.

Trade data reveals anticipatory surge: Thursday’s release of January trade figures exposed the economy’s pre-tariff hoarding behavior, with the deficit exploding to $131.4 billion—a staggering 34% monthly increase. Imports surged by $36.6 billion as companies stockpiled inventory ahead of tariff implementation, creating artificial demand that will reverse violently in coming months. This represents the largest percentage increase in the trade deficit since March 2015, suggesting businesses viewed tariff threats as credible and acted accordingly. The front-loading of imports ironically worsened the very trade imbalances tariffs aimed to address.

Labor markets show early stress fractures: While headline employment data remained solid—151,000 jobs added in February with unemployment ticking up modestly to 4.1%—underlying dynamics revealed growing concerns. Initial jobless claims improved to 221,000, but federal unemployment compensation applications surged to four-year highs as Department of Government Efficiency initiatives accelerated workforce reductions. Manufacturing employment contracted for the third consecutive month, with tariff uncertainty freezing hiring plans across trade-sensitive sectors. The disconnect between still-tight labor markets and building corporate caution creates policy complications for the Federal Reserve.

Inflation expectations regime shift: Market-based inflation measures underwent dramatic repricing as tariff reality set in. Five-year breakeven inflation rates jumped 18 basis points during the week to 2.95%, the highest level since 2022’s inflation surge. Consumer goods companies began announcing price increases within hours of tariff implementation—Walmart indicated 10-25% increases on affected categories, while auto manufacturers warned of $2,000-5,000 vehicle price hikes. The immediate pass-through of tariff costs shattered any hope that corporations would absorb the impact through margin compression.

Federal Reserve Policy Outlook

The Federal Reserve entered its pre-FOMC blackout period on March 8 at precisely the wrong moment, leaving markets without guidance as tariff implementation roiled financial conditions. The central bank faces an impossible trinity: fighting inflation that tariffs will accelerate, supporting growth that trade wars will impair, and maintaining credibility while fiscal policy actively undermines price stability. Market pricing for the March 18-19 meeting shifted dramatically during the week, with probability of a rate hold through 2025 rising to 75% from 60% as traders recognized the Fed’s paralysis.

Behind closed doors, Fed officials surely grapple with whether tariffs represent a one-time price level adjustment or the beginning of sustained inflation pressure. History suggests trade wars create rolling waves of retaliation and adjustment that embed inflation expectations, but premature tightening could amplify tariffs’ negative growth impact. The Committee’s updated economic projections on March 19 will likely show upward revisions to inflation forecasts and downward revisions to growth—the textbook definition of stagflation that monetary policy cannot easily address. Powell’s press conference looms as potentially the most consequential since the inflation fight began.

Week Ahead: FOMC Decision Meets Tariff Aftermath

Retail Sales (March 14): February data takes on heightened importance as first clean read on consumer behavior post-tariff announcement. Consensus expects -0.2% decline as pre-buying exhausted demand, but tariff front-running could create upside surprise.
CPI Inflation (March 12): February CPI becomes critical marker for pre-tariff price pressures. Core expected at 0.3% monthly, but any upside surprise would cement hawkish Fed pivot given tariff acceleration ahead.
FOMC Meeting (March 18-19): Most consequential Fed meeting in years as Committee must address tariff implications. Updated dot plot likely shows fewer 2025 cuts while Powell faces intense questioning on stagflation risks.
Housing Starts (March 19): Mortgage rates above 7% and construction cost surge from steel/lumber tariffs create perfect storm for housing. Permits data will reveal if builders are retrenching.
Michigan Sentiment (March 15): Early read on consumer confidence post-tariff implementation. Inflation expectations component critical given visible price increases across retail channels.

US Economic Positioning and Global Context

America’s turn toward economic nationalism via tariffs creates profound dislocations in the post-war economic order, with implications extending far beyond near-term market volatility. The synchronous easing by major central banks—ECB’s cut to 2.5%, China’s comprehensive stimulus package—reflects recognition that US trade policy represents a permanent shock requiring sustained monetary offset. Yet this policy divergence creates its own instabilities, with massive capital flows toward US assets even as American policy grows increasingly erratic.

Dollar hegemony faces first real test: The great irony of “America First” trade policy is its potential to undermine the very dollar supremacy it claims to defend. This week’s Treasury International Capital data showing $254.3 billion in March inflows demonstrates continued foreign appetite for US assets, but conversations in Beijing, Brussels, and beyond increasingly focus on reducing dollar dependence. The combination of weaponized trade policy, fiscal profligacy approaching 7% of GDP, and political volatility creates conditions where dollar alternatives gain momentum. For fixed income investors, this means reassessing long-held assumptions about Treasury market depth, foreign demand reliability, and currency stability. The bear steepening in the curve this week may represent early recognition that term premium must rise to compensate for policy uncertainty that tariffs exemplify. Credit markets’ failure to adequately price corporate risks suggests the repricing process has only just begun.

Key Articles of the Week

Fed’s Powell Gets Chance to Address Trade War, Stagflation Fears

Reuters

March 7, 2025
Read Article
U.S. International Trade in Goods and Services, January 2025

U.S. Bureau of Economic Analysis

March 7, 2025
Read Article
Wall St Ends Higher After Fed Chief’s Comments, But Posts Big Weekly Loss

Reuters

March 7, 2025
Read Article
US Labor Market Steady, Tariffs and Federal Government Layoffs a Risk to Outlook

Reuters

March 6, 2025
Read Article
10-Year Treasury Yield Rises After Weaker-Than-Expected Jobs Growth, Powell Comments

CNBC

March 7, 2025
Read Article
Employment Situation News Release – February 2025 Results

Bureau of Labor Statistics

March 7, 2025
Read Article
Initial Claims Data – Weekly Jobless Claims Fall More Than Expected

Federal Reserve Bank of St. Louis (FRED)

March 6, 2025
Read Article

March 9, 2025

Duration & Credit Pulse: March 2, 2025

Duration & Credit Pulse – Week Ending March 2, 2025 | Mariemont Capital

Duration & Credit Pulse

Week Ending March 2, 2025

Executive Summary

Bottom Line: Trump’s surprise 25% EU tariff announcement on February 26 shattered the Treasury rally and triggered credit spread widening from historic tights, forcing markets to confront stagflation risks just as Fed Vice Chair Barr resigned. The 10-year yield plunged 22 basis points to 4.21% before tariff fears halted the decline, while investment grade spreads widened 5bp and high yield surged 14bp as risk-off sentiment returned—marking the definitive end of the early-2025 goldilocks environment and ushering in a new regime of heightened volatility and policy uncertainty.

Duration Dashboard

Maturity	February 23, 2025	March 2, 2025	Weekly Δ	5-Year Percentile
2‑Year	4.20%	3.99%	-21 bp	58th %ile (moderate)
5‑Year	4.27%	4.02%	-25 bp	71st %ile (elevated)
10‑Year	4.43%	4.21%	-22 bp	76th %ile (high)
30‑Year	4.68%	4.49%	-19 bp	81st %ile (extreme)

Treasury Rally Meets Tariff Reality Check

Curve Analysis: Dramatic yield compression before tariff reversal characterized the week’s Treasury market action. Treasury yields experienced their sharpest weekly decline since July 2024, with the 5-year leading the charge down 25 basis points to 4.02%. The curve maintained its modest steepness with 2s10s at 22 basis points, but the parallel shift lower reflected genuine growth concerns rather than Fed easing expectations. The dramatic compression—taking the 10-year from 4.43% to 4.21%—occurred despite core PCE inflation printing at 2.6%, highlighting how quickly sentiment shifted from inflation fears to recession worries. By week’s end, tariff announcements had already begun reversing some gains, foreshadowing March’s yield backup.

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.

Tariff Shock Reshapes Everything: President Trump’s February 26 announcement of 25% tariffs on EU imports—America’s second-largest export market worth $351 billion annually—fundamentally altered market dynamics for 2025. The timing couldn’t have been worse: just as Treasury yields were breaking below key technical levels on growth concerns, the inflationary implications of a trans-Atlantic trade war forced an abrupt reassessment. Markets now face the toxic combination of slowing growth and persistent inflation—stagflation—that renders traditional Fed policy tools ineffective. The subsequent announcements of Section 232 investigations into copper, timber, and lumber imports only reinforced that trade policy uncertainty would dominate market psychology.

Credit Pulse

Metric	February 23, 2025	March 2, 2025	Weekly Δ	5-Year Percentile
IG OAS	78 bp	83 bp	+5 bp	19th %ile (tight)
HY OAS	280 bp	294 bp	+14 bp	11th %ile (very tight)
VIX Index	18.21	19.63	+1.42	38th %ile (moderate)

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.

Credit Spread Regime Change Begins: The week’s 14 basis point widening in high yield spreads may seem modest, but it marks the beginning of a new credit cycle. After compressing to just 256bp in late February—levels seen only at the peak of 2007 and briefly in 2021—spreads have nowhere to go but wider. With the Fed constrained by 2.6% core inflation, unable to ease aggressively even as growth slows, credit investors face the worst possible environment: deteriorating fundamentals without a central bank put. The asymmetry that characterized early 2025—limited upside, massive downside—is now playing out.

US Macroeconomic Assessment – Stagflation Fears Crystallize

The week of February 24 – March 2, 2025 delivered a masterclass in how quickly market narratives can shift as participants grappled with contradictory signals of slowing growth and persistent inflation. The data calendar painted a picture of an economy losing momentum just as policy constraints tightened: personal spending contracted 0.2% in January despite a 0.9% surge in income, suggesting consumers were retrenching amid uncertainty. Core PCE inflation at 2.6% annually remained stubbornly above target, while consumer confidence plummeted to its lowest levels since spring 2024.

Consumer confidence collapse signals turning point: Both major confidence surveys delivered alarming results, with the Conference Board index plunging to 98.3—below all economist estimates—while the University of Michigan survey showed 12-month inflation expectations surging to 6.0%. Reuters reported respondents explicitly cited Trump administration policies as their primary concern, with tariff fears dominating household psychology. The divergence between surging income (+0.9%) and contracting spending (-0.2%) pushed the savings rate to 4.6%, suggesting precautionary behavior reminiscent of pre-recession periods.

Manufacturing barely hangs on: The ISM Manufacturing PMI at 50.3 technically remained in expansion territory but masked significant weakness beneath the surface. New orders contracted while prices paid accelerated approximately 20% due to tariff impacts, creating margin pressure that would intensify through spring. Chicago PMI data later in the week confirmed regional weakness, printing below 50 and suggesting the industrial sector was already tipping into contraction before trade wars fully escalated.

Tariff bombshell changes everything: Trump’s February 26 announcement of 25% EU tariffs represented a dramatic escalation in trade tensions, targeting $351 billion in annual imports from America’s second-largest trading partner. The move, coming without warning or negotiation, shattered any remaining hopes for measured policy approaches. Markets immediately priced in both the direct inflation impact—potentially adding 0.5-1.0% to CPI—and the growth-destroying effects of retaliatory measures. The subsequent announcements of Section 232 investigations into copper, timber, and lumber imports signaled this was just the beginning of a broader protectionist push.

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.

Key Articles of the Week

Treasury Investors Anticipate Fed Shift From Inflation to Economic Growth Risks

Bloomberg

February 26, 2025
Read Article
Treasury Yields Linger Near 2025 Lows on Economic Doubts

Bloomberg

February 27, 2025
Read Article
US Treasury Rally Sends Yields Back Below 4% as Inflation Cools

Bloomberg

February 28, 2025
Read Article
Trump policy concerns send US consumer confidence plummeting to eight-month low

Reuters

February 25, 2025
Read Article
Wall Street ends higher after Zelenskiy and Trump clash

Reuters

February 28, 2025
Read Article
Markets News: Stocks Rise After Benign Inflation Data; Major Indexes Post February Losses

Investopedia

February 28, 2025
Read Article
Fed expected to respond strongly to inflation, job market conditions, research shows

Reuters

February 24, 2025
Read Article
Weekly Market Performance — February 28, 2025

LPL Financial

February 28, 2025
Read Article

March 2, 2025

Duration & Credit Pulse: February 23, 2025

Duration & Credit Pulse – Week Ending February 23, 2025 | Mariemont Capital

Duration & Credit Pulse

Week Ending February 23, 2025

Executive Summary

Bottom Line: Credit markets displayed dangerous complacency as spreads compressed to pre-crisis tights despite hawkish FOMC minutes revealing deep Fed concerns about tariff-driven inflation risks. Treasury yields declined modestly with 2s10s steepening to 23 basis points, suggesting markets are pricing an extended Fed pause—but historically tight credit spreads at the 94th percentile offer minimal cushion for the policy uncertainty ahead, creating asymmetric downside risk for spread products.

Duration Dashboard

Maturity	February 16, 2025	February 23, 2025	Weekly Δ	5-Year Percentile
2‑Year	4.26%	4.19%	-7 bp	68th %ile (elevated)
5‑Year	4.32%	4.25%	-7 bp	82nd %ile (high)
10‑Year	4.47%	4.42%	-5 bp	85th %ile (extreme)
30‑Year	4.69%	4.67%	-2 bp	88th %ile (extreme)

Bull Steepening as Markets Price Extended Fed Pause

Curve Analysis: Flight to quality drives modest yield compression across the curve. Treasury markets exhibited classic bull steepening dynamics as front-end yields declined 7 basis points while the long bond fell just 2 basis points. The 2s10s spread widened from 21 to 23 basis points, reflecting market confidence that the Fed will maintain its pause through 2025 amid tariff uncertainty. Despite the rally, yields remain at elevated historical percentiles (68th-88th), suggesting limited room for further compression absent a growth scare. The 10-year’s decline to 4.42%—its lowest since mid-December—signals nascent flight-to-quality flows as equity volatility increased.

The Treasury market’s modest rally masked significant undercurrents as hawkish FOMC minutes collided with equity market weakness. The 2-year yield’s 7 basis point decline to 4.19% led the move lower, driven by futures markets pushing out rate cut expectations while paradoxically seeking safety in duration. This apparent contradiction—buying bonds despite a more hawkish Fed—reflects growing concern that tariff-driven inflation could force policy mistakes. The persistence of extreme yield percentiles across the curve underscores that we remain in restrictive territory, with the 30-year at the 88th percentile of its 5-year range still offering positive real yields even as inflation expectations creep higher.

FOMC Minutes Reveal Tariff Angst: The January 28-29 meeting minutes exposed a Federal Reserve grappling with unprecedented uncertainty. “Almost all participants judged that upside risks to the inflation outlook had increased” due to potential trade and immigration policy changes—language that marks a sharp departure from recent confident disinflation narratives. The Fed’s newfound “patience” isn’t dovish accommodation but rather paralysis in the face of supply-side shocks they can’t model or control. Markets initially misread this as bullish for bonds, but the combination of sticky inflation and trade war risks creates a toxic backdrop for duration at current yields.

Credit Pulse

Metric	February 16, 2025	February 23, 2025	Weekly Δ	5-Year Percentile
IG OAS	96 bp	94 bp	-2 bp	12th %ile (extremely tight)
HY OAS	259 bp	256 bp	-3 bp	6th %ile (near all-time tights)
VIX Index	19.47	20.82	+1.35	42nd %ile (moderate)

Credit markets entered rarified territory as investment grade spreads compressed to 94 basis points—levels not witnessed since 2007’s pre-crisis exuberance. High yield’s 256 basis point spread places it at the 6th percentile of its 5-year range, territory reached only during peak liquidity moments. This compression occurred despite VIX rising to 20.82 and equity markets posting their worst week since October. The disconnect between spread levels and rising volatility exemplifies late-cycle dynamics where reaching for yield overwhelms risk assessment. Corporate bond shorts have increased 25% year-over-year as institutional investors buy protection, yet spreads grind tighter on robust technicals and $172.8 billion of February investment grade issuance finding eager buyers.

Spread Asymmetry Reaches Dangerous Extremes: With high yield spreads at the 6th percentile and offering just 256 basis points over Treasuries yielding 4.4%, the risk-reward has rarely been worse. The last time spreads compressed to these levels amid rising macro uncertainty was February 2020—one month before pandemic volatility sent them soaring above 1,000 basis points. Today’s combination of tight valuations, Fed uncertainty, and trade war risks creates similar asymmetry: perhaps 25 basis points of tightening potential versus 200+ basis points of widening risk. Why accept equity-like downside for bond-like returns?

US Macroeconomic Assessment – Markets Confront Policy Paralysis

The week of February 17-23 marked a critical juncture as financial markets grappled with the implications of an increasingly paralyzed Federal Reserve facing tariff-driven inflation risks. The release of January FOMC minutes on February 18 laid bare the central bank’s dilemma: traditional monetary policy tools prove impotent against supply-side shocks while fiscal expansion continues unabated. This policy vacuum created volatile cross-currents, with equity markets initially surging to all-time highs on geopolitical optimism before reversing sharply as reality intruded.

Fed minutes expose deep uncertainty: The January 28-29 FOMC minutes revealed a committee struggling to incorporate “unusual uncertainty” around trade and immigration policies into their framework. The phrase “upside risks to inflation have increased” appeared repeatedly, marking a significant shift from December’s confidence. Most tellingly, the minutes showed growing divergence among members about the neutral rate’s location—suggesting the Fed has lost its north star just when navigation matters most. Markets initially misinterpreted the Fed’s “patience” as dovish, but careful reading reveals paralysis rather than accommodation.

Geopolitical hopes fade quickly: Monday’s explosive rally on Bloomberg reports of potential Ukraine-Russia peace talks epitomized market desperation for positive catalysts. The S&P 500’s new all-time high proved fleeting as traders recognized that even conflict resolution wouldn’t address core domestic challenges: sticky inflation, massive deficits, and trade war escalation. By week’s end, the Dow had shed 2.6% while defensive sectors like healthcare outperformed—classic late-cycle rotation patterns emerging.

Corporate America braces for margin pressure: February’s record investment grade issuance of $172.8 billion partly reflected companies terming out debt before conditions deteriorate. Management commentary increasingly focused on passing through higher costs to consumers, with multiple firms warning of price increases to offset tariffs. This dynamic—where policy actively stokes inflation while the Fed watches helplessly—hasn’t been seen since the 1970s. Consumer confidence measures remain depressed as real wage gains evaporate under persistent price pressures.

Federal Reserve Policy Outlook

The Federal Reserve finds itself trapped between the Scylla of resurgent inflation and the Charybdis of growth risks, with trade policy adding unprecedented complexity to an already challenging landscape. This week’s FOMC minutes revealed a central bank fundamentally questioning its analytical framework, with members acknowledging that standard models cannot capture the nonlinear effects of tariffs, immigration restrictions, and retaliatory measures. The result is a monetary authority choosing paralysis disguised as patience.

Market pricing has adjusted dramatically, with futures now assigning just 67 basis points of cuts for all of 2025—down from 100+ basis points expected in January. More concerning, the term structure of expectations shows increasing probability of rate hikes in 2026 as tariff pass-through becomes evident. The Fed’s challenge is that traditional tools prove ineffective against supply shocks: raising rates to combat tariff-driven inflation would crush demand without addressing root causes. Yet standing pat risks unanchoring inflation expectations carefully rebuilt over decades. This lose-lose dynamic explains credit markets’ schizophrenic behavior—seeking yield while buying downside protection.

Week Ahead: Critical Data Tests Market Resilience

Personal Income & Spending (February 26): January data takes on outsized importance given consumer resilience questions. Consensus expects 0.3% income growth versus 0.4% spending—implying further savings depletion. PCE inflation details will be scrutinized for tariff pass-through evidence.
Durable Goods Orders (February 27): December’s Boeing-driven distortions should clear, revealing underlying capital spending trends. Watch core capital goods for business investment momentum amid policy uncertainty.
GDP Revision (February 28): Q4’s second revision expected to hold at 2.3% growth, but component details matter more. Inventory dynamics and final demand composition will signal Q1 momentum.
Chicago PMI (February 28): Regional manufacturing surveys have diverged; Chicago’s read will help clarify whether industrial recession fears are overdone or spreading.
Treasury Auction Calendar: Heavy supply week with 2-year, 5-year, and 7-year auctions testing demand at current yield levels. Foreign participation metrics increasingly important given deficit trajectory.

US Economic Positioning and Global Context

The United States occupies an increasingly isolated position in the global economic order, pursuing aggressive fiscal expansion and protectionist trade policies while other developed nations focus on disinflation and integration. This divergence manifests in the widest US-German 10-year spread since reunification and a dollar index near 20-year highs despite twin deficits. Traditional economic relationships continue breaking down: the Phillips Curve has re-steepened after years of flatness, the dollar strengthens on risk-off days, and credit spreads compress amid rising volatility.

International spillovers accelerate: China’s measured responses to US trade actions—targeting energy and agriculture rather than Treasuries—suggest a sophisticated strategy of imposing maximum political pain while maintaining financial system stability. European yields remain anchored by ECB easing expectations, creating capital flow dynamics that further support US assets despite deteriorating fundamentals. This “exorbitant privilege” enables America to run larger deficits for longer but ultimately increases the day of reckoning’s severity. For fixed income allocators, this environment demands fundamental reassessment: when credit offers equity-like risk at bond-like returns, when duration provides limited diversification benefits, and when your own government becomes the primary source of volatility, traditional portfolio construction fails. The modest Treasury rally and persistent spread compression may represent the last opportunity to reposition before correlations flip negative and diversification matters most.

Key Articles of the Week

Fed Minutes Signal Officials on Hold Until Inflation Improves

Bloomberg

February 19, 2025
Read Article
Fed officials are worried about tariffs’ impact on inflation and see rate cuts on hold, minutes show

CNBC

February 19, 2025
Read Article
10-year Treasury yield falls to lowest since December on latest signs of slowing economy

CNBC

February 25, 2025
Read Article
Stock Market Today: Live Updates for Feb 18

Bloomberg

February 17, 2025
Read Article
Treasury Yields Snapshot: February 21, 2025

ETF Trends

February 21, 2025
Read Article

February 23, 2025

Duration & Credit Pulse: February 16, 2025

Duration & Credit Pulse – Week Ending February 16, 2025 | Mariemont Capital

Duration & Credit Pulse

Week Ending February 16, 2025

Executive Summary

Bottom Line: Hot inflation data shattered rate cut hopes as January CPI surged 0.5% monthly—the highest since August 2023—while Trump’s steel tariffs and China’s energy retaliation created a toxic stagflationary cocktail. The modest Treasury rally and credit spread tightening belie deeper structural concerns: with inflation re-accelerating, trade wars escalating, and fiscal deficits ballooning, fixed income markets face a regime change requiring entirely new analytical frameworks where political risk dominates traditional metrics.

Duration Dashboard

Maturity	February 9, 2025	February 16, 2025	Weekly Δ	5-Year Percentile
2‑Year	4.29%	4.26%	-3 bp	71st %ile (elevated)
5‑Year	4.35%	4.33%	-2 bp	85th %ile (high)
10‑Year	4.50%	4.48%	-2 bp	88th %ile (extreme)
30‑Year	4.69%	4.70%	+0 bp	91st %ile (extreme)

Inflation Shock Meets Modest Treasury Rally

Curve Analysis: Treasury markets delivered a puzzling response to the week’s inflation shock, with yields declining modestly despite CPI’s alarming surge. The 2-5 year sector led the rally with 2-3 basis point declines, while the 30-year remained unchanged—creating a subtle bull steepening. This counterintuitive reaction suggests either extreme positioning unwinding after the prior week’s selloff or growing conviction that aggressive Fed tightening will ultimately break the economy. With yields still at extreme historical percentiles (88th-91st), the modest rally barely dents the backup since December.

The Treasury market’s muted response to explosive inflation data revealed deep cross-currents beneath the surface. Despite January CPI’s 0.5% monthly surge shocking consensus, yields declined modestly across the curve with the 2-year down 3 basis points to 4.26%. This paradoxical rally likely reflected technical factors—hedge funds covering massive short positions ahead of Presidents Day weekend—rather than fundamental reassessment. The persistence of extreme yield percentiles across all maturities (71st-91st percentile) underscores that we remain in historically restrictive territory, with the 10-year at 4.48% still well above levels that have historically triggered economic stress.

Inflation Persistence Changes Everything: January’s CPI shock wasn’t just a number—it was a regime change moment. The 0.5% monthly surge, driven by broad-based pressures from shelter to eggs to energy, shattered the comfortable narrative of steady disinflation back to 2%. With “supercore” services surging 0.8% monthly, wage-price dynamics appear entrenched just as tariff wars threaten additional supply shocks. The Fed’s reaction function has fundamentally shifted: forget rate cuts in 2025, the question now is whether hikes return to the table if inflation reaccelerates further.

Credit Pulse

Metric	February 9, 2025	February 16, 2025	Weekly Δ	5-Year Percentile
IG OAS	78 bp	76 bp	-2 bp	15th %ile (very tight)
HY OAS	276 bp	271 bp	-5 bp	8th %ile (extremely tight)
VIX Index	16.54	14.77	-1.77	25th %ile (low)

Credit markets displayed remarkable complacency in the face of mounting macro risks, with spreads tightening across the board. Investment grade spreads compressed 2 basis points to just 76bp—placing them at the 15th percentile of their 5-year range—while high yield tightened 5bp to an eye-watering 271bp (8th percentile). The VIX’s decline to 14.77 suggests options markets see no immediate stress, despite inflation shocks and trade war escalation. This extreme spread compression amid deteriorating fundamentals creates a dangerous asymmetry: massive downside risk for minimal carry compensation. The last time spreads were this tight amid similar macro uncertainty was February 2020—weeks before pandemic volatility exploded.

Credit Complacency Reaches Dangerous Extremes: High yield spreads at the 8th percentile of their 5-year range price in perfection just as the macro backdrop deteriorates rapidly. The 5bp tightening this week—amid hot inflation, trade wars, and evaporating Fed put—epitomizes late-cycle complacency. History shows when spreads reach single-digit percentiles while macro volatility rises, the subsequent widening is violent and indiscriminate. With IG spreads offering just 76bp over Treasuries yielding 4.5%, why take credit risk when duration offers better risk-reward?

US Macroeconomic Assessment – Inflation Shock Meets Trade War Reality

The week of February 9-16 marked a critical inflection point as persistently hot inflation collided with escalating trade tensions, forcing a fundamental reassessment of the economic outlook. Tuesday’s CPI release delivered the kind of upside surprise markets had grown unaccustomed to: headline inflation surged 0.5% monthly with core up 0.4%, both exceeding even the highest Street estimates. The breadth of price pressures proved particularly alarming—shelter contributed 0.26 percentage points, egg prices soared 15.2% on avian flu impacts, and critically, services ex-housing jumped 0.8% signaling entrenched wage-price dynamics.

Trade war escalation compounds inflation pressures: President Trump’s February 10 announcement of 25% steel and aluminum tariffs—eliminating hundreds of exemptions—triggered immediate retaliation. China’s response came within 24 hours: 15% tariffs on U.S. LNG and coal, 10% on crude oil, plus expanded export controls on critical minerals. The timing couldn’t be worse—layering supply-side inflation atop already-hot demand conditions creates 1970s-style stagflation risks. Natural gas prices spiked to $4.10/MMBtu while steel futures surged, feeding directly into core goods inflation.

Fed caught in impossible position: Chair Powell’s Congressional testimony revealed a central bank struggling to adapt its framework to the new reality. His acknowledgment that tariffs create “upward pressure on inflation” while potentially slowing growth epitomizes the policy dilemma. Markets immediately repriced: CME FedWatch showed 2025 rate cut probability collapsing from 75% to just 35%, with some dealers beginning to price hiking risk for H2 2025. The Fed’s challenge is distinguishing one-time price level effects from persistent inflation—made impossible when tariffs keep ratcheting higher.

Consumer confidence craters as real wages turn negative: The University of Michigan survey plunged to 52—worse than 2008 levels—as consumers grappled with accelerating prices and policy chaos. With January CPI at 3.0% year-over-year and wage growth at 4.1%, the modest real wage gains that sustained spending are evaporating. Retail sales data next week will reveal whether sentiment weakness has translated to actual spending pullback. Early credit card data suggests consumers are maintaining nominal spending by depleting savings—an unsustainable dynamic.

Federal Reserve Policy Outlook

The Federal Reserve faces its most complex challenge since the Volcker era: fighting resurgent inflation while trade wars threaten growth and fiscal dominance limits policy flexibility. This week’s data demolished market expectations for 2025 rate cuts, with futures now pricing extended pause through year-end and growing risk of additional hikes if inflation accelerates. The January CPI details were particularly troubling for the Fed—”supercore” services inflation at 0.8% monthly annualizes to nearly 10%, far above levels consistent with 2% target.

Powell’s testimony revealed subtle but important shifts in Fed thinking. His emphasis on “patience” and data dependence masks deeper concerns about policy credibility. Having declared victory too early in 2023, the Fed cannot afford another premature pivot. Yet with real rates already restrictive and trade wars threatening demand destruction, aggressive tightening risks overkill. The committee appears to be coalescing around an extended hold at 4.25%-4.50%, hoping restriction works with a lag while maintaining optionality. But if March CPI shows continued acceleration—particularly if tariff pass-through becomes evident—the Fed may face the unthinkable: resuming hikes just as recession risks mount.

Week Ahead: Data Deluge Meets Trade Tensions

Retail Sales (February 20): January data takes on heightened importance given consumer confidence collapse. Consensus expects tepid 0.2% gain, but tariff front-running could create upside surprise. Watch control group for underlying demand trends.
FOMC Minutes (February 21): January meeting minutes will reveal depth of Fed’s inflation concerns pre-CPI shock. Focus on any discussion of resuming hikes and views on neutral rate in new environment.
Existing Home Sales (February 22): Housing market response to 4.5%+ mortgages becomes critical for Fed’s wealth effect transmission. Inventory dynamics key for shelter inflation outlook.
Trade negotiations intensify: March 4 deadline for Canada/Mexico tariffs looms with negotiations stalled. Corporate America mobilizing against steel tariffs while China considers rare earth export bans.

US Economic Positioning and Global Context

The United States enters unprecedented territory with inflationary pressures building just as policy tools become constrained. The combination of fiscal deficits approaching 7% of GDP, resurgent inflation requiring restrictive monetary policy, and trade wars disrupting supply chains creates a policy trilemma with no good solutions. Traditional economic relationships are breaking down—the Phillips Curve steepening, Treasury correlation with risk assets flipping, and dollar strength persisting despite twin deficits.

Global implications accelerate: International markets are positioning for sustained U.S. inflation and policy divergence. European yields remain anchored by ECB easing while Treasury yields push toward 5%, creating the widest Atlantic spread in decades. China’s measured retaliation—targeting energy rather than Treasuries—suggests Beijing is playing the long game, willing to endure short-term pain while America potentially inflates away its competitive advantages. For fixed income investors, this environment demands fundamental rethinking: when your own government becomes the primary source of volatility, when inflation protection matters more than credit quality, and when political risk dominates economic fundamentals, traditional frameworks offer little guidance. The modest Treasury rally this week amid shocking inflation data may prove to be the last gift for those still believing in the old regime—use it wisely.

Key Articles of the Week

US CPI Report January 2025: Live Data on Inflation, Consumer Price Index News

Bloomberg

February 12, 2025
Read Article
Fed’s Powell, quizzed about trade, Musk, and bank safety, says economy is fine

Reuters

February 11, 2025
Read Article
China retaliates with additional tariffs of up to 15% on select U.S. imports starting Feb. 10

CNBC

February 4, 2025
Read Article
China tariff retaliation targets its modest US energy imports

Reuters

February 4, 2025
Read Article
PPI report January 2025: Prices rose 0.4%

CNBC

February 13, 2025
Read Article
Key takeaways from Fed Chair Jerome Powell’s congressional hearing

CNN Business

February 11, 2025
Read Article
China retaliates with tariffs on US goods after Trump’s move

Al Jazeera

February 4, 2025
Read Article
Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee

U.S. Department of the Treasury

February 2025
Read Article

February 16, 2025

Duration & Credit Pulse: February 9, 2025

Duration & Credit Pulse – Week Ending February 9, 2025 | Mariemont Capital

Duration & Credit Pulse

Week Ending February 9, 2025

Executive Summary

Bottom Line: Trump’s tariff bombshell triggered dramatic curve flattening as short rates rose on inflation fears while long rates fell on growth concerns. The January employment report disappointed at 143,000 jobs versus 170,000 expected, yet unemployment paradoxically fell to 4.0%, keeping the Fed firmly on hold at 4.25%-4.50%. With the 2-year yield up 9 basis points but the 30-year down 10 basis points, markets are pricing a complex scenario of near-term inflation pressure followed by eventual economic slowdown—a challenging environment for fixed income positioning.

Duration Dashboard

Maturity	February 2, 2025	February 9, 2025	Weekly Δ	5-Year Percentile
2‑Year	4.20%	4.29%	+9 bp	55th %ile (median)
5‑Year	4.33%	4.35%	+2 bp	83rd %ile (elevated)
10‑Year	4.54%	4.50%	-4 bp	89th %ile (high)
30‑Year	4.79%	4.69%	-10 bp	91st %ile (extreme)

Tariff Uncertainty Drives Dramatic Curve Flattening

Curve Analysis: The Treasury curve experienced notable flattening during the week, with divergent movements across maturities. The 2-year yield rose 9 basis points to 4.29%, reflecting near-term inflation concerns from tariff announcements. In contrast, the 10-year and 30-year yields fell 4 and 10 basis points respectively, suggesting investors sought duration as a hedge against potential growth headwinds. This curve flattening dynamic—short rates up, long rates down—indicates markets are pricing both immediate inflation risks and longer-term recession concerns from trade disruptions.

Treasury markets navigated a week of extraordinary policy volatility with a notable flattening bias. The February 1 tariff announcement initially sparked selling at the short end, pushing the 2-year yield up 9 basis points as markets priced in near-term inflation pass-through. However, longer maturities rallied, with the 30-year yield falling 10 basis points as investors sought duration protection against potential economic disruption. This divergent movement—short rates up, long rates down—created the most significant curve flattening in months. Despite the rally in long bonds, the 30-year yield at the 91st percentile of its 5-year range indicates yields remain historically elevated, offering value for long-term investors willing to weather near-term volatility.

Curve Flattening Signals Mixed Messages: The dramatic curve flattening—2-year up 9 basis points while 30-year down 10—reveals a market torn between competing narratives. Short-end selling reflects immediate inflation concerns from tariffs, while the long-end rally suggests growing conviction that trade wars will ultimately prove deflationary through demand destruction. This isn’t the typical “risk-off” playbook where all yields fall together. Instead, we’re seeing a nuanced response that prices both stagflation risks and eventual Fed accommodation. The key question: which narrative wins?

Credit Pulse

Metric	February 2, 2025	February 9, 2025	Weekly Δ	5-Year Percentile
IG OAS	77 bp	78 bp	+1 bp	17th %ile (very tight)
HY OAS	266 bp	276 bp	+10 bp	11th %ile (extremely tight)
VIX Index	16.43	16.54	+0.11	40th %ile (normal)

Credit markets displayed remarkable resilience in the face of trade policy uncertainty, with investment-grade spreads barely budging and high-yield widening a modest 10 basis points. Despite the widening, high-yield spreads at the 11th percentile of their 5-year range remain at extremely tight levels, suggesting remarkable investor complacency. The VIX’s minimal rise to 16.54 indicates limited risk perception despite the policy headlines. Strong technical factors—including robust fund inflows and healthy new issue demand—continue to support these historically tight spreads. The disconnect between rising macro uncertainty and compressed credit spreads creates an asymmetric risk profile favoring defensive positioning.

Historic Spread Tights Create Asymmetric Risk: With high-yield spreads at the 11th percentile and investment grade at the 17th percentile of their 5-year ranges, credit markets are priced for perfection amid rising macro uncertainty. The 10 basis point weekly widening in HY may seem modest, but from these extreme levels, it could signal the beginning of a repricing cycle. History shows that when spreads reach these extremes while macro volatility rises, the subsequent widening can be swift and painful. Consider rotating from credit risk to duration risk, where the long end now offers both value and downside protection.

US Macroeconomic Assessment – Mixed Signals Amid Policy Fog

The week’s economic data painted a nuanced picture of an economy showing both resilience and emerging cracks. Friday’s employment report delivered the headline disappointment with just 143,000 jobs added versus 170,000 expected, marking a clear deceleration from 2024’s robust pace. Yet the unemployment rate’s decline to 4.0% and solid wage growth of 4.1% year-over-year suggest the labor market remains fundamentally healthy despite the slowdown.

Tariff announcement dominates narrative: President Trump’s February 1 executive orders invoking emergency powers to impose 25% tariffs on Mexico and Canada, alongside 10% duties on China, marked a dramatic escalation in trade policy. The immediate market reaction was severe, but subsequent negotiations—including Mexican commitments on border security and Canadian engagement on trade remedies—helped calm nerves. The administration’s willingness to delay implementation while negotiations proceed suggests tariffs may be more negotiating tactic than economic policy.

Consumer confidence wobbles: Early February survey data showed consumer sentiment declining sharply as households grappled with tariff uncertainty. The Conference Board’s measure dropped to an eight-month low, with consumers particularly concerned about future inflation. This sentiment shift could become self-fulfilling if it translates to reduced spending, though retail sales data due next week will provide clearer insight into actual consumer behavior versus stated concerns.

Federal Reserve Policy Outlook

The Federal Reserve finds itself in an increasingly complex position, balancing solid but softening labor market data against the inflationary risks posed by potential tariffs. This week’s mixed employment data reinforces the Fed’s patient approach, with markets continuing to price the current 4.25%-4.50% range as appropriate for now. Current market pricing suggests the Fed will maintain this stance, with the first rate cut not expected until June at the earliest.

The central bank’s challenge is distinguishing between one-time price level effects from tariffs and sustained inflationary pressure requiring policy response. With core inflation still above target and labor markets resilient, the Fed has little urgency to ease. However, should tariffs trigger a sharper growth slowdown or financial market stress, the calculus could shift quickly. For now, data dependence remains the watchword, with upcoming CPI data on February 12 taking on heightened importance.

Week Ahead: Critical Data and Diplomatic Drama

January CPI (Feb 12): Inflation data takes center stage with markets hypersensitive to any tariff pass-through. Consensus expects 0.3% monthly core, but any upside surprise could reverse the long-end rally and steepen the curve dramatically.
Powell Congressional Testimony (Feb 11-12): The Fed Chair heads to Capitol Hill for semi-annual testimony, facing tough questions on tariff impacts. Markets will parse every word for policy clues amid the uncertainty.
Retail Sales (Feb 14): Consumer spending data will reveal whether sentiment weakness is translating to actual economic impact. Strong sales would validate Fed patience.
Trade Negotiations Continue: Behind-the-scenes diplomacy with Mexico and Canada intensifies ahead of March implementation deadlines. Any breakthroughs could spark relief rallies.

US Economic Positioning and Global Context

The United States enters a period of heightened uncertainty with fundamental strengths intact but policy risks mounting. The 4% unemployment rate and steady growth provide buffers against trade shocks, while corporate balance sheets remain healthy. Yet the administration’s aggressive trade stance introduces volatility that markets are still struggling to price. The curve flattening dynamic—with the 10-year yield falling to 4.50% even as short rates rise—suggests growing concern about the economic endgame. The dollar’s resilience despite tariff threats reflects continued safe-haven appeal, but this could reverse quickly if trade wars escalate.

Global spillovers accelerating: International markets are already adjusting to the new trade reality, with Mexico and Canada exploring retaliatory measures while strengthening ties with other partners. China’s measured response thus far—focusing on WTO challenges rather than immediate retaliation—suggests a strategic patience that could either defuse tensions or presage more dramatic moves. For fixed income investors, this environment presents unique opportunities: the curve flattening creates value at the long end for those believing in eventual resolution, while extremely tight credit spreads (HY at 11th percentile) argue for reducing risk exposure. The divergence between Treasury curve dynamics and credit complacency won’t persist indefinitely—one of these markets is wrong.

Key Articles of the Week

U.S. economy added just 143,000 jobs in January but unemployment rate fell to 4%

CNBC

February 7, 2025
Read Article
January US Jobs Report: 143K New Jobs Added, Falling Short of Expectations

J.P. Morgan

February 7, 2025
Read Article
Fed Monetary Policy Report flags solid economy, elevated markets

Reuters

February 7, 2025
Read Article
The Employment Situation – January 2025

Bureau of Labor Statistics

February 7, 2025
Read Article

February 9, 2025

Duration & Credit Pulse: January 31, 2025

Duration & Credit Pulse – Week Ending January 31, 2025 | Mariemont Capital

Duration & Credit Pulse

Week Ending January 31, 2025

Executive Summary

Bottom Line: The Federal Reserve held rates steady as expected while Treasury yields edged lower despite President Trump’s tariff announcement on Canada, Mexico, and China on Friday. The week’s dichotomy—hawkish Fed positioning amid robust Q4 GDP growth juxtaposed with markets’ muted reaction to escalating trade tensions—underscores the delicate balance between policy uncertainty and economic momentum.

Duration Dashboard

Maturity	January 24, 2025	January 31, 2025	Weekly Δ	5-Year Percentile
2‑Year	4.27%	4.22%	-5 bp	67th %ile (elevated)
5‑Year	4.43%	4.43%	0 bp	92nd %ile (extreme)
10‑Year	4.62%	4.58%	-4 bp	95th %ile (extreme)
30‑Year	4.85%	4.83%	-2 bp	96th %ile (extreme)

Treasury Yield Curve Movement

Curve Analysis: The Treasury curve shifted lower in parallel fashion during a week marked by significant policy developments. The uniform 2-5 basis point decline across maturities suggests a modest flight-to-quality bid despite the Fed’s hawkish hold and Trump’s tariff announcement. This resilience in Treasuries amid potentially inflationary policies reveals market confidence in the Fed’s ability to maintain price stability.

Treasury yields retreated modestly across the curve despite the Federal Reserve’s hawkish hold and President Trump’s Friday tariff announcement. The 2-year yield’s 5 basis point decline suggests markets had already priced in the Fed’s pause, while the resilience at the long end—with 10-year and 30-year yields remaining at extreme 95th-96th percentiles—reflects persistent concerns about fiscal expansion and inflation risks. The curve’s modest bull flattening amid significant policy developments reveals a market caught between competing narratives.

Policy Crosscurrents: Trump’s Friday announcement of 25% tariffs on Canada and Mexico, alongside 10% on China (effective March 1), failed to spark the Treasury selloff many anticipated. This muted reaction suggests either market skepticism about implementation or confidence that negotiated exemptions will soften the blow. The disconnect between dramatic policy announcements and calm bond markets may not persist as tariff deadlines approach.

Credit Pulse

Metric	January 24, 2025	January 31, 2025	Weekly Δ	5-Year Percentile
IG OAS	0.74 bp	0.76 bp	+2 bp	21st %ile (tight)
HY OAS	2.61 bp	2.70 bp	+9 bp	12th %ile (tight)
VIX Index	14.85	16.20	+1.35	27th %ile (low)

Credit markets displayed the first signs of caution since Trump’s inauguration, with high-yield spreads widening 9 basis points while remaining at historically tight levels. The modest backup in spreads, combined with the VIX rising to 16.20, suggests investors are beginning to price in tariff-related uncertainties. Yet with spreads still in the bottom quintile of their five-year range, credit markets retain substantial optimism about corporate fundamentals and the net impact of Trump’s policy mix.

Tariff Implementation Risk: Friday’s tariff announcement with a March 1 implementation date creates a critical test for market complacency. The limited initial reaction—Treasury yields down, credit spreads only modestly wider—suggests markets expect either negotiated solutions or limited economic impact. This optimism could prove misplaced if trade partners retaliate or supply chain disruptions materialize, particularly given the 25% rates on North American partners exceed most expectations.

US Macroeconomic Assessment – Fed Holds Steady Amid Growth Momentum

The Federal Reserve’s decision to maintain rates at 4.25-4.50% at its January 28-29 meeting came as no surprise, but Chair Powell’s messaging reinforced the central bank’s patient approach amid conflicting economic signals. The Fed acknowledged continued solid economic expansion and stable labor markets while noting that inflation “remains somewhat elevated.” This balanced assessment, delivered against the backdrop of Trump’s evolving policy agenda, signals an extended pause in the easing cycle.

Q4 GDP delivers solid growth: Fourth quarter 2024 GDP growth of 2.4% annualized, while slightly below the third quarter’s 3.1% pace, demonstrated the economy’s underlying resilience entering the Trump administration. Consumer spending remained the primary driver, contributing 2.8 percentage points to growth, suggesting households maintained confidence despite political transition. The data provides the Fed comfort to remain on hold while assessing the inflationary implications of new fiscal and trade policies.

Tariff announcement tests market resilience: President Trump’s Friday announcement of tariffs—25% on Canada and Mexico, 10% on China, effective March 1—represents the first concrete trade action of his second term. The decision to delay implementation and offer potential exemptions suggests a more tactical approach than campaign rhetoric implied. Markets’ subdued reaction may reflect either confidence in negotiated outcomes or underestimation of economic disruption risks.

Federal Reserve Policy Outlook

The FOMC statement emphasized that the Committee “will carefully assess incoming data, the evolving outlook, and the balance of risks” in considering future rate adjustments. This language, unchanged from December, reinforces the data-dependent pause that markets now expect to extend through mid-year. Powell’s press conference struck a notably neutral tone, avoiding commentary on fiscal policy while emphasizing the Fed’s commitment to achieving its dual mandate regardless of the political environment.

Market pricing has adjusted dramatically, with fed funds futures now implying just one rate cut in 2025, down from two cuts expected at year-end. The combination of resilient growth, sticky inflation above 2%, and uncertainty about tariff impacts creates a compelling case for extended Fed patience. The next inflection point may come with the March 18-19 FOMC meeting, which includes updated economic projections that must incorporate early assessments of Trump policy impacts.

Week Ahead: Tariff Negotiations and Economic Data

January employment report (Feb 7): First jobs data of the Trump era will be scrutinized for any early impacts from immigration policy changes and business sentiment shifts.
Tariff negotiations intensify: With March 1 implementation looming, expect increased diplomatic activity and market volatility as details emerge about potential exemptions and partner country responses.
Trump’s State of the Union preview: The President’s first major policy address to Congress will provide clarity on legislative priorities including tax cuts and infrastructure spending.
January CPI (Feb 13): Inflation data takes on added importance given tariff announcements, with any upside surprise likely cementing expectations for an extended Fed pause.

US Economic Positioning and Global Context

The week’s developments underscore the US economy’s unique position—strong enough to absorb policy shocks yet vulnerable to self-inflicted trade disruptions. The Fed’s steady hand amid political volatility provides an important anchor for markets, though this stability may be tested as tariff deadlines approach. The limited market reaction to Friday’s trade announcement suggests either dangerous complacency or justified confidence in America’s economic resilience.

Dollar dynamics: The greenback’s mixed performance despite tariff announcements reflects competing forces. While trade uncertainty typically weakens currencies, the combination of relatively hawkish Fed positioning and US growth outperformance continues to support dollar strength. The real test comes as trading partners formulate responses—retaliatory measures could accelerate global monetary divergence and entrench the dollar’s haven status despite America being the source of trade tensions.

Key Articles of the Week

Federal Reserve issues FOMC statement

Federal Reserve

January 29, 2025
Read Article
Trump tariff plan rattles stocks, pushes dollar, Treasury yields higher

Reuters

January 31, 2025
Read Article
Fed meeting recap: Powell says FOMC is ‘in no hurry’ to cut again after holding rates steady

Bankrate

January 29, 2025
Read Article
Treasury Yields Snapshot: January 31, 2025

ETF Trends

January 31, 2025
Read Article
Gross Domestic Product, 4th Quarter and Year 2024 (Third Estimate)

Bureau of Economic Analysis

March 27, 2025
Read Article
FOMC Minutes, January 28-29, 2025

Federal Reserve

February 19, 2025
Read Article
Tracking regulatory changes in the second Trump administration

Brookings Institution

May 28, 2025
Read Article
Washington Watch: Trump Administration Policies

U.S. Bank

December 11, 2024
Read Article

January 31, 2025

Duration & Credit Pulse: January 24, 2025

Duration & Credit Pulse – Week Ending January 24, 2025 | Mariemont Capital

Duration & Credit Pulse

Week Ending January 24, 2025

Executive Summary

Bottom Line: Markets displayed remarkable equilibrium during Trump’s inauguration week, with Treasury yields edging marginally lower while credit spreads compressed to extreme tights. The VIX’s decline to the 18th percentile signals complacency despite the administration’s sweeping Day One executive orders, suggesting investors are betting on pro-business policies outweighing potential trade and immigration disruptions.

Duration Dashboard

Maturity	January 17, 2025	January 24, 2025	Weekly Δ	5-Year Percentile
2‑Year	4.29%	4.27%	-2 bp	69th %ile (elevated)
5‑Year	4.43%	4.43%	-1 bp	92nd %ile (extreme)
10‑Year	4.63%	4.62%	-1 bp	97th %ile (extreme)
30‑Year	4.86%	4.85%	-1 bp	97th %ile (extreme)

Treasury Yield Curve Stability

Curve Analysis: The Treasury curve exhibited remarkable stability during a week of profound political transition. The minimal 1-2bp declines across all maturities suggest markets had already priced in Trump’s policy agenda, with investors adopting a wait-and-see approach rather than reacting to Day One executive orders.

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.

Inauguration Impact: Trump’s first week saw a flurry of executive actions including immigration restrictions, federal workforce changes, and signals on future tariff policies. Yet markets rallied on Tuesday’s first trading day after MLK Day, with the S&P 500 gaining 2% for the week. This divergence between dramatic policy shifts and calm fixed income markets suggests investors are focusing on deregulation and tax cut prospects rather than potential economic disruptions.

Credit Pulse

Metric	January 17, 2025	January 24, 2025	Weekly Δ	5-Year Percentile
IG OAS	0.74 bp	0.74 bp	0 bp	16th %ile (tight)
HY OAS	2.66 bp	2.61 bp	-5 bp	9th %ile (extreme tight)
VIX Index	15.97	14.85	-1.12	18th %ile (low)

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.

Extreme Complacency Warning: The combination of HY spreads at the 9th percentile and VIX at 18th percentile during a major political transition represents dangerous complacency. Markets appear to be pricing only the upside of Trump policies (tax cuts, deregulation) while ignoring potential disruptions from mass deportations, trade wars, and fiscal expansion. This asymmetric risk pricing leaves markets vulnerable to negative surprises.

US Macroeconomic Assessment – The Trump Era Begins

President Trump’s return to the White House on January 20 marked the beginning of an ambitious policy agenda that could reshape the American economy. His Day One executive orders spanned immigration, energy, federal workforce restructuring, and trade policy signals—creating both opportunities and risks for financial markets. The immediate market reaction was surprisingly positive, with equities rallying despite the sweeping changes announced.

Executive action blitz: Trump signed 26 executive orders on his first day, the most of any president in history. Key economic measures included declaring a national emergency at the southern border, initiating federal workforce reductions, pulling out of the Paris Climate Agreement, and signaling future tariff actions. Notably absent were immediate tariff implementations, which may have contributed to market relief. The administration’s stated intent to impose 25% tariffs on Mexico and Canada by February 1 keeps trade uncertainty elevated.

Market dichotomy: The calm in Treasury markets contrasts sharply with the policy upheaval, suggesting investors had already positioned for Trump’s return. The equity rally on Tuesday’s first trading day—with the Dow gaining 2.5% for the week—indicates markets are prioritizing expected tax cuts and deregulation over near-term disruption risks. This optimism may prove premature if immigration enforcement and trade conflicts materialize as advertised.

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.

Key Articles of the Week

Trump signs executive actions on Jan. 6, TikTok, immigration and more

NPR

January 21, 2025
Read Article
Stocks rally to close out strong week, await Trump policies

Reuters

January 18, 2025
Read Article
A round-up of global stock markets in Trump’s inauguration week

Euronews

January 24, 2025
Read Article
Trump’s first week: what does it mean for your money?

MoneyWeek

January 24, 2025
Read Article
Initial Rescissions Of Harmful Executive Orders And Actions

The White House

January 21, 2025
Read Article
US Stock Market Outlook 2025: Policy Changes and Volatility

IG

January 14, 2025
Read Article
Trump executive orders 2025: What he’s signed, other expected acts

NBC Washington

January 21, 2025
Read Article
US stock performance on dates of presidential inaugurations

Reuters

January 20, 2025
Read Article

January 24, 2025

Duration & Credit Pulse: January 17, 2025

Duration & Credit Pulse – Week Ending January 17, 2025 | Mariemont Capital

Duration & Credit Pulse

Week Ending January 17, 2025

Executive Summary

Bottom Line: Treasury yields retreated meaningfully as December CPI data reinforced disinflationary trends, while pre-inauguration uncertainty drove a classic flight-to-quality bid. The 10-year yield’s 13bp decline from extreme 99th percentile levels signals markets are pricing a more benign policy path ahead, though positioning remains stretched as investors await clarity on Trump’s trade and fiscal agenda.

Duration Dashboard

Maturity	January 10, 2025	January 17, 2025	Weekly Δ	5-Year Percentile
2‑Year	4.38%	4.29%	-10 bp	71st %ile (elevated)
5‑Year	4.58%	4.43%	-14 bp	92nd %ile (extreme)
10‑Year	4.76%	4.63%	-13 bp	97th %ile (extreme)
30‑Year	4.95%	4.86%	-9 bp	97th %ile (extreme)

The Treasury curve experienced a pronounced bull flattening, with intermediate maturities leading the rally. December’s CPI print at 2.9% year-over-year—slightly below consensus—catalyzed the move lower in yields. Despite the decline, rates remain at historically extreme percentiles, reflecting persistent concerns about fiscal sustainability and potential inflationary impacts from Trump’s policy agenda. The 5-year sector’s 14bp decline suggests markets are moderating expectations for aggressive near-term policy shifts.

Pre-Inauguration Positioning: The week’s Treasury rally reflects a classic pre-event risk reduction as markets await clarity on Trump’s Day One executive orders. The administration’s mixed signals on tariff timing—with reports suggesting a more gradual approach—have tempered the most hawkish scenarios that drove yields to extreme levels. This tactical retreat in yields may prove temporary if inaugural announcements reignite inflation concerns.

Credit Pulse

Metric	January 10, 2025	January 17, 2025	Weekly Δ	5-Year Percentile
IG OAS	0.76 bp	0.74 bp	-2 bp	16th %ile (tight)
HY OAS	2.76 bp	2.66 bp	-10 bp	11th %ile (tight)
VIX Index	19.54	15.97	-3.57	25th %ile (low)

Credit markets displayed remarkable resilience, with spreads compressing further to extreme tights despite the political transition uncertainty. High-yield spreads at the 11th percentile reflect unwavering confidence in corporate fundamentals and the growth outlook. The VIX’s sharp decline to the 25th percentile suggests options markets are pricing minimal near-term disruption from policy changes, potentially underestimating tail risks around trade policy implementation.

Complacency Alert: The combination of credit spreads at historical tights (11th-16th percentiles) and suppressed volatility (VIX at 25th percentile) ahead of a major policy transition represents a concerning asymmetry. Markets appear to be pricing a goldilocks scenario of pro-growth policies without inflationary consequences—a precarious assumption given the administration’s stated trade and immigration objectives.

US Macroeconomic Assessment – Inflation Progress Meets Political Uncertainty

Wednesday’s December CPI release provided the bond market with a critical data point ahead of Trump’s inauguration. The 2.9% year-over-year headline inflation, coupled with core CPI at 3.2%, reinforced the disinflationary trend while highlighting persistent stickiness in services. The report’s market-friendly surprise—core inflation slightly below the 3.3% consensus—triggered an immediate Treasury rally and temporarily eased concerns about an inflation resurgence under Trump policies.

Inflation dynamics: While headline inflation approaches the Fed’s target, the composition remains problematic. Shelter costs, representing one-third of the CPI basket, increased 0.3% monthly and continue to run at 4.6% annually. Food prices accelerated with a 0.3% monthly gain, driven by a dramatic 15.2% surge in egg prices due to avian flu. These sticky components suggest the “last mile” of disinflation remains challenging, potentially limiting the Fed’s flexibility as Trump’s policies take shape.

Pre-inauguration positioning: Markets entered the final week before Trump’s return to office in a defensive posture. Reports suggesting a more gradual approach to tariff implementation—potentially starting with targeted measures rather than blanket duties—contributed to the week’s risk-on tone. However, the administration’s ability to move quickly on executive orders regarding trade, energy, and immigration keeps markets on edge for potential volatility shocks.

Federal Reserve Policy Outlook

The December CPI data solidifies market expectations for a Fed pause at the January 28-29 FOMC meeting, with futures pricing less than 5% probability of any policy action. The combination of still-elevated core inflation at 3.2% and uncertainty about incoming administration policies creates a compelling case for the Fed to maintain its wait-and-see approach. Chair Powell faces the delicate task of maintaining central bank independence while navigating potential pressure from the new administration.

Markets have dramatically repriced 2025 rate cut expectations, with only 50 basis points of easing now priced through year-end—down from 100 basis points expected just weeks ago. This hawkish repricing reflects both the economy’s resilience and concerns that Trump’s fiscal stimulus and trade policies could reignite inflationary pressures. The Fed’s challenge will be distinguishing between transitory policy-induced price shocks and persistent inflation requiring monetary response.

Week Ahead: Inauguration and Policy Clarity

Trump inauguration (Jan 20): Markets will parse every word of the inaugural address for policy signals, particularly on trade and immigration. Executive orders expected on Day One could trigger immediate market reactions across currencies, commodities, and rates.
Treasury auctions: Next week’s 2-year, 5-year, and 7-year auctions will test demand at these elevated yield levels. Foreign participation remains a key metric given concerns about fiscal sustainability and potential reserve diversification.
Corporate earnings acceleration: Bank earnings will provide early reads on net interest margin compression expectations and commercial real estate exposure. Technology sector guidance will be scrutinized for AI investment sustainability.
Economic data calendar: Housing starts and existing home sales data will reveal whether lower mortgage rates are beginning to thaw the frozen housing market. Initial jobless claims remain critical for labor market monitoring.

US Economic Positioning and Global Context

The week’s market action underscores the delicate balance between US economic exceptionalism and policy uncertainty. Treasury yields remain near historical extremes despite the week’s decline, reflecting both strong growth fundamentals and fiscal sustainability concerns. The dollar’s resilience, even as yields retreated, suggests international investors maintain confidence in US assets despite political transition risks.

Global divergence: As markets await Trump’s policy specifics, the contrast between US dynamism and global weakness becomes more pronounced. European growth concerns and China’s structural challenges reinforce the dollar’s haven status, potentially limiting any sustained Treasury sell-off. However, this divergence also amplifies risks should Trump’s policies disrupt global trade flows or trigger retaliatory measures from trading partners.

Key Articles of the Week

CPI inflation December 2024: Annual rate rises to 2.9%

CNBC

January 15, 2025
Read Article
CPI edged higher in December, complicating the Fed’s upcoming decision on rate cuts

CBS News

January 15, 2025
Read Article
Trump’s US presidency return ushers in new era of volatile markets

Reuters

January 15, 2025
Read Article
US stock performance on dates of presidential inaugurations

Reuters

January 17, 2025
Read Article
Treasury Yields Snapshot: January 17, 2025

ETF Trends

January 17, 2025
Read Article
Why Have 10-Year U.S. Treasury Yields Increased Since The Fed Started Cutting Rates?

J.P. Morgan

January 15, 2025
Read Article
US Fed officials expected slower rate cuts in 2025, say December minutes

Al Jazeera

January 8, 2025
Read Article
Will the Fed Raise Interest Rates in 2025?

Morningstar

January 3, 2025
Read Article
Trump trade uncertainty exposes stretched markets to volatility shocks

Reuters

January 7, 2025
Read Article

January 17, 2025

Category: weekly summaries

Executive Summary

Duration Dashboard

Bull Flattening Amid Global Policy Divergence

Credit Pulse

US Macroeconomic Assessment – Stagflation Fears Dominate Fed Thinking

Federal Reserve Policy Outlook

Week Ahead: Focus Shifts to Growth Data

US Economic Positioning and Global Context

Key Articles of the Week

Executive Summary

Duration Dashboard

Curve Flattens Amid Trade War Chaos

Credit Pulse

US Macroeconomic Assessment – Trade War Reality Shock

Federal Reserve Policy Outlook

Week Ahead: FOMC Meeting Dominates as Trade Wars Escalate

US Economic Positioning and Global Context

Key Articles of the Week

Executive Summary

Duration Dashboard

Bear Steepening Amid Tariff Turbulence

Credit Pulse

US Macroeconomic Assessment – Tariffs Transform the Landscape

Federal Reserve Policy Outlook

Week Ahead: FOMC Decision Meets Tariff Aftermath

US Economic Positioning and Global Context

Key Articles of the Week

Executive Summary

Duration Dashboard

Treasury Rally Meets Tariff Reality Check

Credit Pulse

US Macroeconomic Assessment – Stagflation Fears Crystallize

Federal Reserve Policy Outlook

Week Ahead: Critical Data Tests Stagflation Thesis

US Economic Positioning and Global Context

Key Articles of the Week

Executive Summary

Duration Dashboard

Bull Steepening as Markets Price Extended Fed Pause

Credit Pulse

US Macroeconomic Assessment – Markets Confront Policy Paralysis

Federal Reserve Policy Outlook

Week Ahead: Critical Data Tests Market Resilience

US Economic Positioning and Global Context

Key Articles of the Week

Executive Summary

Duration Dashboard

Inflation Shock Meets Modest Treasury Rally

Credit Pulse

US Macroeconomic Assessment – Inflation Shock Meets Trade War Reality

Federal Reserve Policy Outlook

Week Ahead: Data Deluge Meets Trade Tensions

US Economic Positioning and Global Context

Key Articles of the Week

Executive Summary

Duration Dashboard

Tariff Uncertainty Drives Dramatic Curve Flattening

Credit Pulse

US Macroeconomic Assessment – Mixed Signals Amid Policy Fog

Federal Reserve Policy Outlook

Week Ahead: Critical Data and Diplomatic Drama

US Economic Positioning and Global Context

Key Articles of the Week

Executive Summary

Duration Dashboard

Treasury Yield Curve Movement

Credit Pulse

US Macroeconomic Assessment – Fed Holds Steady Amid Growth Momentum

Federal Reserve Policy Outlook

Week Ahead: Tariff Negotiations and Economic Data

US Economic Positioning and Global Context

Key Articles of the Week

Executive Summary

Duration Dashboard

Treasury Yield Curve Stability

Credit Pulse

US Macroeconomic Assessment – The Trump Era Begins

Federal Reserve Policy Outlook

Week Ahead: Fed Meeting and Policy Clarity