Duration Dashboard

Treasury markets navigated a week of extraordinary policy volatility with a notable flattening bias. The February 1 tariff announcement initially sparked selling at the short end, pushing the 2-year yield up 9 basis points as markets priced in near-term inflation pass-through. However, longer maturities rallied, with the 30-year yield falling 10 basis points as investors sought duration protection against potential economic disruption. This divergent movement—short rates up, long rates down—created the most significant curve flattening in months. Despite the rally in long bonds, the 30-year yield at the 91st percentile of its 5-year range indicates yields remain historically elevated, offering value for long-term investors willing to weather near-term volatility.

Credit Pulse

Credit markets displayed remarkable resilience in the face of trade policy uncertainty, with investment-grade spreads barely budging and high-yield widening a modest 10 basis points. Despite the widening, high-yield spreads at the 11th percentile of their 5-year range remain at extremely tight levels, suggesting remarkable investor complacency. The VIX's minimal rise to 16.54 indicates limited risk perception despite the policy headlines. Strong technical factors—including robust fund inflows and healthy new issue demand—continue to support these historically tight spreads. The disconnect between rising macro uncertainty and compressed credit spreads creates an asymmetric risk profile favoring defensive positioning.

Federal Reserve Policy Outlook

The Federal Reserve finds itself in an increasingly complex position, balancing solid but softening labor market data against the inflationary risks posed by potential tariffs. This week's mixed employment data reinforces the Fed's patient approach, with markets continuing to price the current 4.25%-4.50% range as appropriate for now. Current market pricing suggests the Fed will maintain this stance, with the first rate cut not expected until June at the earliest.

The central bank's challenge is distinguishing between one-time price level effects from tariffs and sustained inflationary pressure requiring policy response. With core inflation still above target and labor markets resilient, the Fed has little urgency to ease. However, should tariffs trigger a sharper growth slowdown or financial market stress, the calculus could shift quickly. For now, data dependence remains the watchword, with upcoming CPI data on February 12 taking on heightened importance.

Week Ahead: Critical Data and Diplomatic Drama

• January CPI (Feb 12): Inflation data takes center stage with markets hypersensitive to any tariff pass-through. Consensus expects 0.3% monthly core, but any upside surprise could reverse the long-end rally and steepen the curve dramatically.
• Powell Congressional Testimony (Feb 11-12): The Fed Chair heads to Capitol Hill for semi-annual testimony, facing tough questions on tariff impacts. Markets will parse every word for policy clues amid the uncertainty.
• Retail Sales (Feb 14): Consumer spending data will reveal whether sentiment weakness is translating to actual economic impact. Strong sales would validate Fed patience.
• Trade Negotiations Continue: Behind-the-scenes diplomacy with Mexico and Canada intensifies ahead of March implementation deadlines. Any breakthroughs could spark relief rallies.

US Economic Positioning and Global Context

The United States enters a period of heightened uncertainty with fundamental strengths intact but policy risks mounting. The 4% unemployment rate and steady growth provide buffers against trade shocks, while corporate balance sheets remain healthy. Yet the administration's aggressive trade stance introduces volatility that markets are still struggling to price. The curve flattening dynamic—with the 10-year yield falling to 4.50% even as short rates rise—suggests growing concern about the economic endgame. The dollar's resilience despite tariff threats reflects continued safe-haven appeal, but this could reverse quickly if trade wars escalate.

Global spillovers accelerating: International markets are already adjusting to the new trade reality, with Mexico and Canada exploring retaliatory measures while strengthening ties with other partners. China's measured response thus far—focusing on WTO challenges rather than immediate retaliation—suggests a strategic patience that could either defuse tensions or presage more dramatic moves. For fixed income investors, this environment presents unique opportunities: the curve flattening creates value at the long end for those believing in eventual resolution, while extremely tight credit spreads (HY at 11th percentile) argue for reducing risk exposure. The divergence between Treasury curve dynamics and credit complacency won't persist indefinitely—one of these markets is wrong.