Duration Dashboard

Treasury markets navigated extraordinary crosscurrents during the week, with the Federal Reserve's decision to slow quantitative tightening providing technical support even as officials maintained their cautious stance on rate cuts. The reduction in monthly Treasury redemptions from $25 billion to just $5 billion starting April 1 represents a significant shift in balance sheet policy, effectively increasing duration demand by $20 billion monthly. This technical factor, combined with convexity buying from mortgage portfolios and growing recession fears, overwhelmed any hawkish implications from the dot plot maintaining just two cuts for 2025.

Credit Pulse

Credit markets demonstrated remarkable resilience despite mounting economic headwinds, with investment grade spreads tightening 2 basis points to 86bp while maintaining their position in the tightest quartile of the five-year range. The paradox of robust primary market activity—March issuance exceeded $200 billion—amid deteriorating fundamentals reflects the powerful technical bid from yield-starved investors. High yield's minimal 1bp tightening to 327bp masks significant dispersion beneath the surface, with transportation and media sectors widening sharply while defensive names in healthcare and utilities saw meaningful compression.

Federal Reserve Policy Outlook

The Federal Reserve exits its March meeting in an increasingly untenable position, attempting to thread the needle between inflation vigilance and growth support with blunt policy tools ill-suited for supply-side shocks. The Committee's economic projections reveal the bind: unemployment rising to 4.4% by year-end while inflation remains stubbornly above target at 2.8%. This combination historically triggers aggressive easing, yet the Fed's hands are tied by inflation dynamics it cannot control through demand management.

Market pricing has converged toward the Fed's view of just two cuts in 2025, with the first not expected until June at the earliest. More concerning for risk assets, the eurodollar curve has begun pricing rate hikes for 2026 as markets grapple with the possibility that tariff-driven inflation becomes embedded in wage-price dynamics. The technical impact of slowing QT provides some offset, but at just $5 billion monthly in Treasury redemptions, the Fed has minimal additional ammunition should conditions deteriorate rapidly. Powell's press conference emphasis on "patience" and "data dependence" offered cold comfort to markets seeking clarity in an increasingly uncertain world.

Week Ahead: Focus Shifts to Growth Data

• Consumer Confidence (March 26): March data takes on heightened importance given February's collapse. Consensus expects modest improvement to 105, but inflation expectations component remains key given tariff impacts on purchasing power.
• Q4 GDP Final (March 28): Third estimate expected to confirm 2.4% growth, but focus shifts to corporate profits and GDP deflator for inflation signals. Downward revision would amplify growth concerns.
• Core PCE Inflation (March 29): February's inflation data represents last clean read before March tariff impacts. Consensus 0.3% monthly would keep annual rate at 2.8%, well above Fed target.
• Chicago PMI (March 29): Regional manufacturing data provides early April insight. Recent weakness in ISM manufacturing suggests continued industrial sector struggles.
• Treasury Auctions: Heavy calendar with 2-year, 5-year, and 7-year auctions testing demand amid Fed balance sheet changes. Foreign participation metrics critical given BOJ policy shift.

US Economic Positioning and Global Context

The confluence of Federal Reserve paralysis, Bank of Japan normalization, and European economic weakness creates a uniquely challenging environment for US fixed income markets. The dollar's 2% surge following the BOJ decision reflects capital flowing to the highest yielder, but this dynamic becomes self-defeating as currency strength amplifies deflationary pressures on traded goods while doing nothing to offset tariff inflation on imports. Traditional correlations continue breaking down: bonds no longer provide reliable equity hedging, credit spreads ignore deteriorating fundamentals, and inflation expectations remain elevated despite slowing growth.

Japan's pivot changes everything: The BOJ's exit from negative rates after eight years marks more than a policy normalization—it signals the end of the global liquidity supercycle that suppressed volatility and yields since the financial crisis. With Japanese 10-year yields at 16-year highs and rising, the reflexive bid for Treasuries from yield-starved Japanese institutions faces its first real competition in a generation. Mrs. Watanabe can now earn positive real returns at home for the first time since 2008. Combined with China's reduced Treasury purchases amid trade tensions, foreign demand—which historically absorbed 40% of issuance—faces structural headwinds just as deficits explode toward $2 trillion. For fixed income investors, the week's developments reinforce a harsh reality: the era of monetary coordination that suppressed volatility and supported risk assets has definitively ended, replaced by policy divergence that amplifies uncertainty and demands more discriminating security selection.