Duration & Credit Pulse
Executive Summary
Bottom Line: Fixed income markets stabilized during the week ending May 4 following the most severe bond market dislocation since COVID-19, triggered by President Trump's April 2 tariff announcements. Despite consumer confidence collapsing to pandemic-era lows (86.0) and manufacturing remaining in contraction (ISM PMI: 48.7%), credit spreads began recovering from their widest levels in two years—investment grade tightened to 95bp from 120bp peak while high yield improved to 425bp from 461bp. Most significantly, the traditional negative stock-bond correlation remained broken as Treasuries failed to provide portfolio protection, fundamentally altering risk management assumptions for institutional investors.
Duration Dashboard
| Maturity | April 27, 2025 | May 4, 2025 | Weekly Δ | 5-Year Percentile |
|---|---|---|---|---|
| 2‑Year | 4.05% | 4.02% | -3 bp | 62nd %ile (middle range) |
| 5‑Year | 4.28% | 4.25% | -3 bp | 74th %ile (elevated) |
| 10‑Year | 4.49% | 4.45% | -4 bp | 81st %ile (elevated) |
| 30‑Year | 4.82% | 4.78% | -4 bp | 88th %ile (extreme) |
Post-Tariff Stabilization Takes Hold
Curve Analysis: Treasury markets exhibited modest stabilization with yields declining 3-4 basis points across the curve, maintaining a 2s30s spread of 76bp. The parallel shift lower reflected neither growth concerns nor Fed easing expectations, but rather exhaustion from the prior week's violent selloff. The 10-year yield's 4.45% level remained firmly in the 81st percentile of its 5-year range, suggesting limited appetite for duration at these levels. Notably, the curve's failure to rally meaningfully despite equity market stress confirmed the broken diversification paradigm that emerged post-tariffs.
The Treasury market's tepid performance during a week of significant risk-off sentiment underscored the fundamental shift in market dynamics. Despite the VIX remaining elevated in the 24-30 range and equity markets under pressure, the 10-year yield traded in a narrow 4.2%-4.6% band throughout the week. This muted response to traditional flight-to-quality flows reflected growing concerns about fiscal sustainability, with markets increasingly focused on the Treasury's massive refinancing needs amid ballooning deficits approaching 7% of GDP.
Credit Pulse
| Metric | April 27, 2025 | May 4, 2025 | Weekly Δ | 5-Year Percentile |
|---|---|---|---|---|
| IG OAS | 102 bp | 95 bp | -7 bp | 31st %ile (moderate) |
| HY OAS | 448 bp | 425 bp | -23 bp | 66th %ile (elevated) |
| VIX Index | 26.85 | 25.42 | -1.43 | 85th %ile (extreme) |
Tariff Recovery Tracker
Credit Spread Recovery
IG: Tightened from 120bp peak to 95bp
HY: Improved from 461bp peak to 425bp
Still 20-30bp wider than pre-tariff levels
Primary Issuance
Remains subdued with minimal new deals
Last major: Holcim $3.4B on April 2
Secondary trading 10-15bp wider
Fund Flows
Stabilizing at +$9.65B weekly inflows
After -$46B April outflows (worst since Oct 2023)
Represents 0.2% of assets
Sector Dispersion
Worst: Energy (-85bp), Cable (-95bp), Rails (-87bp)
Best: Utilities, Consumer Staples (defensive bid)
Tariff-exposed names remain under pressure
Credit markets showed tentative signs of stabilization after experiencing their worst selloff since the regional banking crisis of 2023. Investment grade spreads recovered to 95 basis points from their 120bp panic peak, though remained meaningfully wider than the sub-80bp levels prevailing before tariff announcements. The recovery proved uneven, with high-quality names like Microsoft and Apple seeing robust demand while cyclical and trade-exposed sectors continued to underperform. Secondary market liquidity improved modestly but bid-ask spreads remained elevated, particularly in high yield where dealers maintained defensive positioning.
Consumer & Business Confidence Crisis
The Conference Board's Consumer Confidence Index collapse to 86.0—matching May 2020's pandemic nadir—delivered the week's most alarming economic signal. More troubling than the headline was the Expectations Index plummeting to 54.4, far below the 80 threshold that historically signals recession. This represents the lowest forward-looking sentiment since the October 2011 debt ceiling crisis, suggesting consumers view current policy uncertainty as existentially threatening as a global pandemic.
Labor market fears reach crisis levels: The employment component revealed unprecedented pessimism, with 32.1% of respondents expecting fewer jobs ahead—approaching the 33.7% peak during the 2009 Great Recession. This dramatic shift from January's 14.8% reflects how quickly tariff announcements shattered labor market confidence. Consumers explicitly cited trade policy uncertainty and expected price increases as primary concerns, with inflation expectations surging despite actual inflation remaining contained.
Manufacturing confirms the industrial recession: The ISM Manufacturing PMI's second consecutive sub-50 reading at 48.7% validated consumer fears about economic momentum. New orders contracted for a third straight month while the prices paid component surged, creating the stagflationary dynamic businesses fear most. Comments from purchasing managers highlighted immediate tariff impacts: "Steel prices up 18% overnight," "Cannot get firm quotes beyond 30 days," and "Considering moving production to Mexico, ironically."
The confidence shock's market implications: This collapse in sentiment typically presages significant economic weakness 6-12 months forward, suggesting the Fed faces an impossible choice between fighting tariff-induced inflation and supporting a weakening economy. The last time confidence and manufacturing simultaneously signaled such weakness, the Fed was already easing aggressively—a luxury unavailable with core PCE still above target. Credit markets' failure to fully price this deterioration suggests further spread widening ahead as reality overtakes hope.
US Macroeconomic Assessment – Between Tariff Shock and Fed Paralysis
The week of April 27 - May 4, 2025 captured an economy suspended between the immediate shock of tariff implementation and an uncertain policy response. The April 2 "Liberation Day" announcement of 20% China tariffs (later raised to 125%), 25% steel/aluminum duties, and threatened reciprocal tariffs on all nations created a policy earthquake whose aftershocks continued reverberating through every economic indicator.
Trade dynamics reveal hoarding behavior: While formal trade data awaited release, real-time indicators showed massive inventory accumulation as businesses front-loaded imports ahead of expected tariff escalation. West Coast port traffic surged 40% above normal levels, creating backlogs reminiscent of pandemic-era supply chain disruptions. The dollar's unusual 2% decline despite higher interest rates reflected international concerns about U.S. policy predictability rather than traditional rate differential dynamics.
Inflation expectations decouple from reality: Despite core PCE running at 2.8% annually, market-based inflation expectations surged to levels suggesting 4-5% forward inflation. The 5-year breakeven inflation rate jumped to near 3%, its highest since 2022, while consumer surveys showed even more dramatic moves. This expectations de-anchoring poses the greatest threat to Fed credibility since the 1970s, as psychological inflation becomes self-fulfilling through wage demands and pricing behavior.
Fiscal dominance asserts itself: With the debt ceiling already constraining Treasury operations and deficits approaching 7% of GDP, markets increasingly questioned whether monetary policy retained any independence. The failure of Treasuries to rally despite risk-off sentiment suggested investors now view U.S. government debt through a fiscal sustainability lens rather than as a pure safe haven. This regime shift—from monetary to fiscal dominance—fundamentally alters how markets price interest rate risk.
The confidence shock's market implications: This collapse in sentiment typically presages significant economic weakness 6-12 months forward, suggesting the Fed faces an impossible choice between fighting tariff-induced inflation and supporting a weakening economy. The last time confidence and manufacturing simultaneously signaled such weakness, the Fed was already easing aggressively—a luxury unavailable with core PCE still above target. Credit markets' failure to fully price this deterioration suggests further spread widening ahead as reality overtakes hope.
Federal Reserve Policy Outlook
The Federal Reserve entered its May 6-7 meeting facing the most complex policy landscape since the Volcker era. With rates holding at 4.25%-4.50% and markets pricing 2-3 cuts by year-end, the Committee confronted a fundamental credibility test: how to maintain price stability commitment while acknowledging severe growth risks from trade policy shocks. The persistence of core inflation above target eliminated any near-term easing flexibility, even as forward-looking indicators screamed recession.
Market positioning revealed deep skepticism about the Fed's ability to navigate these crosscurrents. The CME FedWatch tool showed September as the earliest probable cut, but with only 60% probability—reflecting uncertainty about whether tariff-induced inflation would permit any easing in 2025. More concerning, eurodollar futures began pricing rate hikes for 2026, suggesting markets believe the Fed may need to combat persistent inflation even amid economic weakness. This stagflationary pricing hasn't been seen since the 1970s and highlights how trade wars complicate traditional monetary policy transmission mechanisms.
Week Ahead: Critical Tests of Market Resilience
- FOMC Decision (May 7): Markets expect no rate change but desperate for guidance on how tariffs affect the reaction function. Powell's press conference becomes crucial for understanding whether Fed prioritizes growth or inflation risks.
- China Policy Response (May 7): PBOC's anticipated rate cut and RRR reduction could stabilize Asian markets but may trigger competitive devaluation concerns.
- April CPI (May 10): First glimpse of tariff pass-through to consumer prices. Any upside surprise could trigger violent Treasury selling.
US Economic Positioning and Global Context
The United States in early May 2025 stands at a historical inflection point where domestic policy choices threaten to unravel the post-war economic order. The combination of aggressive protectionism, fiscal profligacy approaching 7% of GDP, and a constrained central bank creates a policy trilemma reminiscent of emerging market crises rather than the world's reserve currency issuer. Traditional economic relationships continue breaking down: the Phillips Curve has re-steepened after years of dormancy, the dollar weakens despite rate advantages, and bonds no longer provide reliable portfolio protection.
The end of American exceptionalism? Markets are beginning to price a world where U.S. assets no longer enjoy their historical premium. The broken stock-bond correlation reflects deeper concerns about policy coherence and institutional stability. Foreign central banks, particularly China with its May 7 stimulus announcement, increasingly act to insulate their economies from American policy volatility rather than following Fed leadership. This fragmentation of the global financial system—accelerated by weaponized trade policy—may prove the most lasting legacy of the April 2025 tariff shock. For fixed income investors, the message is clear: the rules have changed, traditional diversification is dead, and navigating this new regime requires fundamental strategy reassessment.
Key Articles of the Week
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US Consumer Confidence Plunged Again in AprilThe Conference BoardApril 29, 2025Read Article
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Manufacturing PMI® at 48.7%; April 2025 Manufacturing ISM® Report On Business®PR Newswire / ISMMay 1, 2025Read Article
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Two Measures of Consumer Attitudes: April 2025Advisor PerspectivesApril 29, 2025Read Article
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US Investment-Grade Spreads Gapping Wider as Treasury Yields FallWestern AssetApril 4, 2025Read Article
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April 2025 Market CommentaryBreckinridge Capital AdvisorsApril 30, 2025Read Article
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Release: Estimated Long-Term Mutual Fund FlowsInvestment Company InstituteMay 1, 2025Read Article
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Q2 2025 Corporate Bond Market OutlookBreckinridge Capital AdvisorsApril 1, 2025Read Article
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Fixed Income Mid-Year Outlook (2025)Charles SchwabMay 1, 2025Read Article
