Duration Dashboard

Treasury markets convulsed in response to President Trump's April 2 "Liberation Day" tariff announcement, experiencing what Reuters described as a selloff reminiscent of the March 2020 "dash-for-cash" episode. The universal 10% baseline tariff combined with reciprocal tariffs ranging from 10% to 34% on major trading partners represented the most aggressive trade action since the Smoot-Hawley tariffs of 1930. Initially, recession fears drove a brief flight-to-quality rally that pushed the 10-year yield down to 3.71% in early April 2 trading. However, this quickly reversed as the inflationary implications became clear, with economists projecting the tariffs would add 2 percentage points to CPI. The subsequent selloff was relentless—yields posted their biggest weekly increase since 2001, while traditional correlations broke down completely as both stocks and bonds sold off in tandem.

Credit Pulse

Credit markets experienced their most severe disruption since the pandemic, with high yield spreads exploding 119 basis points to 461bp—the largest weekly widening since March 2020. Investment grade fared only marginally better, widening 24bp to 120bp as even the highest-quality corporate bonds sold off indiscriminately. The complete shutdown of primary market activity from April 4-6 marked an unprecedented freeze, with no new corporate bonds pricing for three consecutive days. Secondary market liquidity evaporated as dealers pulled back, with bid-ask spreads on investment grade bonds widening to levels not seen since the regional banking crisis. The VIX's surge to 60.13—its 99th percentile over five years—captured the sheer panic gripping markets.

Federal Reserve Policy Outlook

Federal Reserve Chair Jerome Powell's April 4 speech at Stanford University represented his most direct confrontation with administration policy to date, warning that the announced tariffs were "larger than expected" and would likely create significant economic disruption. In unusually blunt language, Powell noted that "the Smoot-Hawley tariffs were actually not this large and they were 95 years ago," adding that the Fed faced "a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation." The Chair emphasized the central bank was "well positioned to wait for greater clarity" before adjusting policy, effectively announcing a prolonged pause despite market turmoil.

Behind the measured public statements, the Fed faces an impossible dilemma. The March FOMC minutes revealed members already worried about "upside risks to inflation from potential changes in trade policy," but none anticipated changes of this magnitude. With tariffs set to add an estimated 2 percentage points to CPI while simultaneously crushing growth, the Fed must choose between fighting inflation (requiring rate hikes) or supporting employment (requiring cuts). Market pricing reflects this confusion, with fed funds futures whipsawing between pricing cuts and hikes as traders struggle to model the Fed's reaction function. The reduction in balance sheet runoff to just $5 billion monthly provides modest liquidity support, but cannot offset the broader market dysfunction that forced Treasury dealers to drastically reduce positions.

Week Ahead: CPI Data and Corporate Earnings in Focus

• March CPI (April 10): Takes on massive importance as final "clean" inflation reading before tariff distortions. Core expected at 0.3% monthly, but any upside surprise could cement fears of stagflation. Market positioning suggests violent reaction to any deviation from consensus.
• Bank Earnings Begin (April 12): JPMorgan and Wells Fargo kick off earnings season with focus on trading revenue windfalls from volatility, credit loss provisioning, and forward guidance on economic outlook. Bank CEOs' comments on tariff impact will be closely parsed.
• Retail Sales (April 15): March retail sales data will show whether consumers pulled forward purchases ahead of tariff implementation. Consensus expects 0.4% gain but wide dispersion in estimates reflects uncertainty.
• FOMC Minutes (April 9): March meeting minutes gain added importance given dramatic change in landscape since meeting. Focus on any discussion of tariff scenarios and how policy might respond to stagflation risks.
• Treasury Auctions: $44 billion 3-year, $39 billion 10-year, and $22 billion 30-year auctions will test whether April 9's strong demand (2.79 bid-cover on 10-year) holds after Trump's partial tariff reversal.

US Economic Positioning and Global Context

The April 2025 tariff shock represents a fundamental break in the post-war economic order, with implications that extend far beyond near-term market volatility. The sheer scale of the announced measures—affecting over $3 trillion in annual trade flows—dwarfs previous trade actions and threatens to unravel decades of global economic integration. While Trump's April 9 announcement of a 90-day pause on reciprocal tariffs (maintaining only the 10% baseline) provided temporary relief, the damage to business confidence and cross-border relationships appears permanent. Companies that spent decades building efficient global supply chains now face the reality that political risk trumps economic efficiency.

International response signals new world order: The muted initial response from major trading partners reflects less restraint than shell-shock at the scope of US actions. ECB President Lagarde's call for Europe to "take control of our destiny" signals recognition that American economic leadership can no longer be assumed. China's decision to let the yuan depreciate past 7.30 while injecting 800 billion yuan in liquidity suggests Beijing is prioritizing domestic stability over dollar holdings. Most significant is the acceleration of non-dollar trading arrangements, with the EU and China fast-tracking digital currency initiatives that could eventually challenge dollar hegemony. For fixed income investors, this week's chaos offers a preview of a world where US Treasuries no longer serve as the undisputed safe haven, where credit spreads must price in policy uncertainty that changes by tweet, and where traditional economic relationships break down entirely. The old playbook is dead; the new one remains unwritten.