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The Treasury market convulsion that began on April 7 evoked comparisons to March 2020's liquidity crisis, with yields rocketing higher even as risk assets sold off sharply. The 10-year yield's intraday journey from 4.21% to 4.58% occurred amid forced deleveraging of an estimated $800 billion in basis trades, creating self-reinforcing selling pressure. Despite the chaos, the April 9 auction of $39 billion in 10-year notes saw surprisingly strong demand with a bid-to-cover ratio of 2.67, suggesting foreign central banks stepped in as opportunistic buyers at these elevated yields.

Credit Pulse

Credit markets experienced their most severe dislocation since COVID-19, with primary markets freezing completely from April 4-7 as no issuer dared test demand amid the volatility. High yield spreads' 119 basis point widening marked the fastest deterioration since March 2020, while investment grade's move to 120bp pushed spreads to their widest since November 2023. Sector performance diverged dramatically based on tariff exposure: cable/satellite bonds fell 95 basis points, railroads dropped 87 basis points, and energy spreads widened 85 basis points as oil prices initially collapsed on recession fears before spiking on Middle East tensions.

Federal Reserve Policy Outlook

Fed Governor Christopher Waller's June 1 speech at the Bank of Korea provided the clearest post-tariff policy guidance, acknowledging "little evidence of trade policy effects in inflation or economic activity data yet" while warning of "downside risks to economic activity and employment and upside risks to inflation." The Fed maintained its 4.25%-4.50% target range at the March meeting while implementing the planned reduction in Treasury redemption caps from $25 billion to $5 billion monthly, but markets increasingly questioned whether conventional monetary policy could address tariff-induced stagflation.

The breakdown in traditional economic relationships left the Fed in uncharted territory. With unemployment still near historic lows but inflation expectations surging on tariff pass-through, the dual mandate pulled in opposite directions. Market pricing shifted dramatically during the week, with fed funds futures moving from expecting two cuts in 2025 to pricing potential hikes by year-end. The central bank's credibility faced its sternest test since the 1970s as fiscal dominance through trade policy threatened to overwhelm monetary policy transmission mechanisms. Treasury Secretary Bessent's public pressure for rate cuts only added to concerns about Fed independence.

Week Ahead: Damage Assessment Begins

• March Retail Sales (April 17): First clean read on consumer behavior during tariff announcement period. Consensus expects -0.4% decline as uncertainty froze spending, but pre-buying could create upside surprise.
• Empire Manufacturing (April 15): Regional Fed survey will capture real-time business sentiment post-tariffs. Forward-looking components on prices and orders critical for supply chain assessment.
• Housing Starts (April 16): Construction industry faces double hit from lumber tariffs and surging mortgage rates above 7.5%. Permits data will reveal if builders are pulling back.
• Weekly Jobless Claims: High-frequency labor market data becomes crucial for tracking tariff impact on employment. Any spike above 250K would signal material deterioration.
• Corporate Earnings Season: Bank earnings kick off with focus on trading revenue windfalls from volatility, loan loss provisioning changes, and forward guidance on credit conditions.

US Economic Positioning and Global Context

The April 2025 tariff shock marked a definitive break from the post-World War II economic order, replacing multilateral trade frameworks with bilateral confrontation and strategic decoupling. The immediate market impact—Treasury yields surging despite equity declines, credit markets freezing, and volatility exploding across asset classes—represented merely the opening salvo in what promises to be a prolonged adjustment to a fundamentally different global economy.

Safe haven reassessment accelerates: The failure of Treasuries to provide portfolio protection during the week's risk-off episode forced institutional investors to reconsider basic assumptions. With approximately $800 billion in leveraged positions unwinding and traditional correlations breaking down, the search for alternative safe havens intensified. Gold's surge above $2,100, the yen's rapid appreciation despite BOJ easing, and even cryptocurrency inflows suggested a fragmentation of the safe asset universe. For the first time since the dollar's emergence as the global reserve currency, market participants questioned whether US assets deserved their privileged status given the policy volatility and fiscal trajectory.

The week ending April 13, 2025 will be studied for decades as the moment financial markets were forced to price a new paradigm: persistent inflation, fractured global trade, questioned dollar hegemony, and volatile correlations. The 37 basis point surge in 10-year yields during a risk-off week shattered the fundamental principle underlying modern portfolio theory. Credit markets' freeze and extreme spread widening despite still-solid fundamentals revealed how quickly technical dynamics can overwhelm economic reality. As market participants surveyed the damage, one conclusion became inescapable: the relative stability of the post-2008 period had ended, replaced by a regime of heightened volatility, policy uncertainty, and challenged assumptions that would define the investment landscape for years to come.