Duration & Credit Pulse
Executive Summary
Bottom Line: With just 5 days until Powell's critical Jackson Hole address, fixed income markets exhibited extreme divergences that cannot persist. Treasury yields rose modestly as resilient consumer spending data pushed the 10-year to 4.32% while credit spreads compressed to historically extreme levels, with investment grade OAS at just the 4th percentile of its 5-year range. The week's modest bear steepening—with 30-year yields rising 7 basis points versus a 1bp decline in 2-years—reflected growing tension between near-term Fed rate cut expectations (91% probability for September) and persistent tariff-driven inflation concerns that complicate the FOMC outlook amid unprecedented committee dissent.
Duration Dashboard
| Maturity | August 10, 2025 | August 17, 2025 | Weekly Δ | 5-Year Percentile |
|---|---|---|---|---|
| 2‑Year | 3.76% | 3.75% | -1 bp | 45th %ile (middle range) |
| 5‑Year | 3.83% | 3.84% | +1 bp | 55th %ile (middle range) |
| 10‑Year | 4.28% | 4.32% | +4 bp | 81st %ile (elevated) |
| 30‑Year | 4.85% | 4.92% | +7 bp | 96th %ile (extreme) |
Pre-Jackson Hole Bear Steepening
Curve Analysis: The Treasury curve exhibited modest bear steepening ahead of Jackson Hole 2025, with the 2s30s spread widening to 117 basis points from 109bp the prior week. The 30-year bond's approach to 5%—now at the 96th percentile of its 5-year range—signals extreme duration risk as markets price simultaneous tariff-induced inflation pressures and uncertain Fed policy trajectory. The relatively stable 2-year yield at 3.75% reflects continued conviction in September rate cuts despite resilient economic data, creating a potentially unstable equilibrium vulnerable to Powell's Jackson Hole guidance.
The week's Treasury market action reflected a delicate balancing act between competing narratives ahead of the Jackson Hole symposium. The 10-year yield's climb to 4.32%, now at the 81st percentile of its 5-year range, came despite futures markets maintaining a 91% probability of September rate cuts. Thursday's retail sales data proving consumer resilience with a 0.5% monthly gain triggered immediate selling in duration, yet the move remained contained as institutional investors positioned for potential dovish surprises from Powell's upcoming Jackson Hole speech.
Credit Pulse
| Metric | August 10, 2025 | August 17, 2025 | Weekly Δ | 5-Year Percentile |
|---|---|---|---|---|
| IG OAS | 73 bp | 70 bp | -3 bp | 4th %ile (extremely tight) |
| HY OAS | 271 bp | 263 bp | -8 bp | 11th %ile (low) |
| VIX Index | 15.15 | 15.09 | -0.06 | 21st %ile (low) |
Credit markets displayed breathtaking complacency during Jackson Hole week, with investment-grade spreads compressing to just 70 basis points—the 4th percentile of the 5-year range and approaching levels last seen before the 2007 financial crisis. High yield's 8bp tightening to 263bp over Treasuries occurred despite jobless claims rising to 235,000 and consumer confidence plummeting, suggesting credit investors remain anchored to the "Fed put" narrative even as structural inflation risks mount. The disconnect between extreme spread compression and elevated Treasury yields creates an asymmetric risk profile where any disappointment could trigger violent repricing.
Global Bond Funds: +$23 billion (19th week >$1B for HY in 2025) Investment Grade: +$8.2 billion despite 70bp spreads (4th percentile) Active ETFs: $42.6B July inflows (2nd highest month on record) Risk Signal: Accepting 4th percentile spreads vs. 5.25% cash = Late-cycle capitulation
• Consumer Confidence: 58.6 (recession level) | Retail Sales: +0.5% m/m (expansion level) • IG Spreads: 4th percentile (extreme greed) | 30-Year Yields: 96th percentile (extreme fear) • VIX: 21st percentile (complacency) | Weekly Claims: 235K (deteriorating trend) • Bond Fund Inflows: $23B weekly (desperation) | CFO Sentiment: 32% planning cuts (caution)
US Macroeconomic Assessment – Consumer Resilience Complicates Fed Calculus
The August 10-17 period delivered a masterclass in mixed signals as resilient consumer spending collided with deteriorating sentiment and elevated tariff impacts. July retail sales, released August 15, rose 0.5% month-over-month matching consensus expectations, with the control group posting a robust 4.8% annualized growth rate. This consumer strength stood in stark contrast to the University of Michigan confidence index's plunge to 58.6, its first decline in four months and approaching recessionary levels. The divergence between actual spending and consumer psychology suggests households are maintaining consumption despite growing anxiety about the economic outlook.
Consumer psychology disconnect deepens: The collapse in Michigan sentiment to recession-era levels while spending remained robust represents more than statistical noise—it signals a fundamental breakdown in traditional economic relationships. Consumers are effectively saying "we're terrified but still shopping," a cognitive dissonance that typically precedes sharp behavioral shifts. The 58.6 confidence reading marks the lowest non-pandemic level since 2011's debt ceiling crisis, yet mall parking lots remain full and credit card spending continues apace. This unstable equilibrium, where spending momentum relies on depleting savings rather than income growth, cannot persist indefinitely.
Labor market cracks widen beneath the surface: Weekly jobless claims data released during the period showed continuing deterioration, with initial claims rising to 235,000 for the week ending August 16, above the 225,000 consensus. More concerning were continuing claims trends suggesting laid-off workers face increasing difficulty finding new employment. The forthcoming FOMC minutes would reveal that Fed officials were already noting "downside risks to employment have increased" even before this latest softening, with two governors dissenting in favor of immediate rate cuts at the July meeting.
Tariff implementation reaches historic proportions: The effective U.S. tariff rate's climb to 18.6%—the highest since 1933—continued reverberating through supply chains and price structures. With 30% levies on EU goods and 50% on Brazilian exports now fully implemented, Yale Budget Lab analysis indicated consumer prices had risen 1.8% in aggregate, equivalent to a $2,400 annual household income reduction. Apparel prices surged 37% and footwear costs jumped 39%, directly impacting core CPI components the Fed monitors for persistent inflation signals. The August 11 announcement of a 90-day pause on reciprocal Chinese tariff increases provided minimal relief given existing measures' cumulative impact.
Inflation expectations destabilize despite Fed credibility: Market-based inflation measures underwent significant repricing during the week, with 5-year breakevens reaching levels suggesting sustained price pressures ahead. The combination of resilient demand, tight labor markets, and tariff pass-through created what Richmond Fed economists termed "the most complex inflation dynamics since the 1970s." Corporate earnings calls increasingly featured warnings about margin compression and the necessity of price increases, with 32% of CFOs planning workforce reductions specifically due to tariff impacts according to quarterly surveys.
Federal Reserve Policy Outlook Ahead of Jackson Hole
The Federal Reserve entered the critical pre-Jackson Hole period facing its most complex policy challenge since the inflation surge began. Markets maintained aggressive easing expectations with a 91% probability of September cuts, yet the week's data—particularly resilient retail sales and persistent tariff impacts—argued for continued patience. The upcoming release of July FOMC minutes would reveal a deeply divided committee, with governors Waller and Bowman dissenting in favor of immediate action while the majority worried about premature easing amid "considerable uncertainty" about inflation trajectory.
Powell's looming Jackson Hole speech on August 22 promised to be the most consequential since his 2022 "pain ahead" warning that triggered the aggressive tightening cycle. The chairman must thread an impossibly narrow needle: acknowledging labor market deterioration without abandoning the inflation fight, addressing tariff-induced price pressures without appearing politically motivated, and maintaining credibility while fiscal policy actively undermines price stability. The bond market's schizophrenic pricing—tight credit spreads suggesting economic optimism while long-term Treasuries price fiscal crisis—reflects the impossibility of predicting how Powell will square this circle.
Week Ahead: Jackson Hole Takes Center Stage
- Fed Chair Powell at Jackson Hole (August 22, 10am ET): The symposium's theme "Reassessing the Effectiveness and Transmission of Monetary Policy" couldn't be more apt. Powell's keynote will set market tone through September FOMC, with focus on how the Fed balances labor market weakness against tariff-driven inflation.
- FOMC Minutes Release (August 21, 2pm ET): July meeting minutes will reveal depth of committee divisions, with particular attention to the historic double dissent and discussion of "considerable uncertainty" around policy transmission in a tariff-shocked economy.
- Flash PMIs (August 23): S&P Global's August manufacturing and services PMIs provide first read on momentum as Jackson Hole concludes. Manufacturing expected below 50 (contraction) while services resilience key for soft landing narrative.
Bottom Line: Positioning for the Jackson Hole Reckoning
The August 10-17 week crystallized the most extreme valuation divergence in modern fixed income history: investment-grade spreads at the 4th percentile while 30-year Treasuries trade at the 96th percentile. This schizophrenic pricing cannot persist—either credit must reprice wider to reflect genuine economic risks, or duration must rally on renewed disinflation hopes. For institutional allocators, the asymmetry is clear: with IG spreads offering just 70bp over Treasuries (versus 150bp historical average) while 30-year bonds yield nearly 5%, the risk/reward favors rotating from credit into duration ahead of Jackson Hole. The $23 billion weekly inflows chasing 4th percentile spreads represent late-cycle desperation, not prudent allocation. Powell's August 22 speech will likely catalyze convergence between these extremes. Position accordingly: reduce credit exposure into strength, establish 7-10 year duration positions on any backup toward 4.40%, and prepare for volatility as markets discover that cutting rates into 18.6% tariffs and 37% apparel inflation may prove the policy error that defines this cycle. The calm of Jackson Hole week masks a coming storm where yesterday's haven (credit) becomes tomorrow's victim.
Frequently Asked Questions – Jackson Hole Week Edition
What is the Jackson Hole Economic Symposium and why does it matter for bonds?
The Jackson Hole Economic Symposium is the Federal Reserve's premier annual policy conference held in Wyoming each August. For bond markets, it matters enormously because Fed chairs traditionally use the venue to signal major policy shifts—Powell's 2022 "higher for longer" speech triggered a 100+ basis point surge in yields. This year's August 22 keynote carries extra weight given the unusual divergence between rate cut expectations and persistent inflation pressures.
Why are Treasury yields rising if the Fed is expected to cut rates in September?
The 10-year yield's rise to 4.32% despite 91% odds of September cuts reflects growing concern about fiscal sustainability and tariff-driven inflation. Markets increasingly worry the Fed may cut rates not because inflation is conquered but because the labor market is weakening—a scenario where easing into persistent price pressures could drive long-term yields even higher. The 30-year bond trading at the 96th percentile of its 5-year range suggests investors demand higher term premium for this policy uncertainty.
How do tariffs impact Federal Reserve interest rate decisions?
Tariffs create a nightmare scenario for the Fed by simultaneously raising inflation (through higher import prices) while slowing growth (through supply chain disruption). With the effective U.S. tariff rate at 18.6%—the highest since 1933—the Fed faces "stagflationary" conditions where traditional monetary tools become less effective. The July FOMC minutes revealed committee members expressing "considerable uncertainty" about how to respond to these competing pressures.
What explains credit spreads at historic lows while Treasury yields remain elevated?
Investment-grade spreads at just 70 basis points (4th percentile) reflect institutional investors' desperate search for yield and faith that the Fed will support markets through any turbulence. The $23 billion flowing into global bond funds weekly shows portfolio managers are willing to accept minimal credit compensation rather than miss potential gains. However, this extreme compression—occurring while 30-year Treasuries trade at the 96th percentile—creates dangerous asymmetry where any negative surprise could trigger violent spread widening.
Key Articles of the Week
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Treasury yields rise after latest retail sales and sentiment dataCNBCAugust 15, 2025Read Article
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U.S. Retail Sales (July 2025) - Economic AnalysisTD EconomicsAugust 15, 2025Read Article
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Two Measures of Consumer Attitudes: August 2025Advisor PerspectivesAugust 16, 2025Read Article
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State of U.S. Tariffs: Implementation UpdateYale Budget LabAugust 7, 2025Read Article
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Global Navigator: Swimming Against the Tide in Late AugustEPFR GlobalAugust 14, 2025Read Article
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Tariffs: Estimating the Economic Impact of 2025 MeasuresFederal Reserve Bank of RichmondAugust 12, 2025Read Article
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August Consumer Sentiment Falls Amid Inflation WorriesNerdWalletAugust 16, 2025Read Article
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Companies May Issue $1.5 Trillion of US Bonds in 2025Goldman SachsAugust 14, 2025Read Article
