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Treasury markets found tentative footing after April's early volatility, though trading patterns revealed persistent anxiety about trade policy impacts. The week's $180 billion in Treasury auctions met surprisingly strong demand, with the 10-year note sale on April 24 drawing a bid-to-cover ratio of 2.79x—well above recent averages—and indirect bidders taking down 67.8% of the offering. This foreign appetite proved crucial in stabilizing yields after their surge to 4.50% earlier in the month. Repo markets functioned smoothly with overnight rates trading 2-3 basis points below the Fed's reverse repo rate, indicating ample liquidity despite cash market volatility.

Credit Pulse

Credit markets staged a relief rally as spreads compressed from the panic levels reached after April 2's tariff announcement, though the recovery appeared more technical than fundamental. Investment grade spreads tightened 15 basis points to 103bp, retracing about half of April's widening but remaining well above the sub-90bp levels that prevailed in Q1. High yield's 45bp compression to 380bp looked more impressive but came on thin volume, with dealers reporting limited two-way flow as real money accounts remained sidelined. Primary issuance remained completely frozen for the second consecutive week—the longest drought since March 2020—as treasurers awaited clarity on funding costs and economic impacts.

Federal Reserve Policy Outlook

The Federal Reserve's policy stance crystallized around maintaining current restrictive settings indefinitely, abandoning any pretense of near-term easing as tariff-induced inflation complicated their mandate. The week's defining moment came via Minneapolis Fed President Kashkari's comprehensive framework for approaching trade policy uncertainty, effectively speaking for a Committee in blackout ahead of the May 1 FOMC meeting.

Kashkari's assertion that the Fed should not "look through" tariff impacts as merely transitory marked a crucial evolution in thinking. His acknowledgment that negotiations could create rolling waves of inflation over "months or years" meant policy would remain restrictive even as growth slowed. The March FOMC minutes, released April 22, revealed this view was already taking hold, with "several" participants noting upside inflation risks from trade policy. More significantly, the Committee's decision to slow quantitative tightening to just $5 billion monthly reflected concerns about financial stability amid fiscal uncertainty rather than monetary easing.

Market pricing adjusted dramatically to this reality. Fed funds futures pushed the first rate cut to December 2025, with only 38 basis points of easing priced for the full year. The terminal rate expectation rose to 3.5%, a full percentage point above pre-tariff estimates. Options markets showed elevated volatility around every FOMC meeting, reflecting uncertainty about how the Fed would balance growth risks against inflation persistence. The Committee's updated projections on May 1 would likely show a dramatic hawkish shift in the dot plot, potentially showing no cuts until 2026.

Week Ahead: May Day FOMC Meets Reality

• FOMC Decision (May 1): Fed expected to hold rates at 4.25%-4.50% with hawkish statement acknowledging tariff inflation risks. Updated economic projections likely show higher inflation, lower growth, and fewer rate cuts than March forecasts.
• April Employment Report (May 2): Consensus expects sharp deceleration to 130,000 jobs from 180,000 prior as tariff uncertainty freezes hiring. Unemployment rate likely ticks up to 4.2% with wages the key variable for Fed policy.
• ISM Manufacturing (May 1): Expected to fall below 50 into contraction territory as regional surveys suggested. Prices paid component critical given raw material cost surge from tariffs.
• Q1 Earnings Calls: Focus on forward guidance revisions as companies grapple with tariff impacts. Retailers, automakers, and consumer electronics facing toughest questions about margin preservation.
• Treasury Quarterly Refunding (May 5-7): Treasury announces borrowing needs for Q2. Market watching for any changes to issuance patterns given foreign demand uncertainty and debt ceiling dynamics.

US Economic Positioning and Global Context

The United States in late April 2025 found itself pioneering an unprecedented economic experiment: testing whether aggressive protectionism could coexist with global financial leadership. The early results suggested significant strain, with traditional economic relationships breaking down and new vulnerabilities emerging across multiple channels.

Dollar dominance faces first real challenge: Despite the week's modest DXY decline to 106.8, structural pressures on dollar hegemony intensified. China accelerated yuan internationalization efforts, announcing new bilateral currency agreements with Brazil and Saudi Arabia. European officials openly discussed reducing dollar reserve holdings in response to "weaponized" trade policy. While Treasury auctions still cleared successfully, the composition showed subtle shifts: domestic buyers increased share while traditional foreign central banks reduced participation. The April TIC data would prove crucial in assessing whether this represented tactical positioning or strategic reallocation.

Global monetary divergence accelerates: The ECB's dovish stance—cutting rates to 2.25% while the Fed held firm—created the widest policy divergence since the Euro's inception. This gap, combined with trade tensions, pushed EUR/USD below 1.05 briefly before recovering to 1.068. Japan maintained negative rates despite inflation above 3%, prioritizing growth over price stability. China unleashed significant stimulus, cutting rates and reserve requirements while directing credit to sectors impacted by US tariffs. This monetary policy cacophony created volatile cross-asset correlations and challenged traditional hedging strategies.

Commodity markets signal stagflation: Gold's surge to $3,400-3,500 despite dollar strength revealed deep market anxiety about fiat currency stability and inflation hedging needs. Oil prices whipsawed between $67-74 as traders balanced demand destruction fears against potential supply disruptions from Middle East tensions. Agricultural commodities spiked on retaliatory tariff fears, with soybeans and corn futures rising 15% during April. Industrial metals faced competing forces: copper and aluminum rose on dollar weakness but faced demand concerns from manufacturing slowdown.

Financial system adapts to new reality: Banks reported surge in trade finance complexity as companies scrambled to adjust supply chains. Credit lines utilization jumped as working capital needs expanded due to inventory stockpiling and payment term extensions. Regional banks with heavy commercial real estate exposure faced additional pressure as office valuations incorporated higher-for-longer rate assumptions. The absence of new corporate bond issuance for two weeks created technical pressures as money market funds and insurance companies faced reinvestment challenges.

Looking forward, the week ending April 27, 2025 may be remembered as when markets began accepting a new paradigm: persistent inflation, constrained monetary policy, and fractured global trade. For fixed income investors, this meant recalibrating expectations around terminal rates, duration risk, and credit selection. The relief rally in spreads offered tactical opportunities but strategic positioning required acknowledging that the benign conditions of the post-GFC era had definitively ended. In this environment, quality, liquidity, and flexibility would prove more valuable than yield enhancement.