Duration Dashboard

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.

Credit Pulse

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.

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.