Duration & Credit Pulse
Executive Summary
Bottom Line: Treasury yields fell across the curve this week as conflicting signals from Treasury markets — hot January PPI data (+0.5% headline, +0.8% services) alongside a meaningful growth deceleration — reinforced stagflation concerns that drove flight-to-quality demand for Treasuries. The 10-year yield declined 14 basis points to 3.94%, its lowest close since October 2024 and its first close below 4% since late November 2025, with the rally concentrated in the belly and long end of the curve. Complicating the picture further, joint U.S.-Israeli strikes on Iran Saturday killed Supreme Leader Ayatollah Khamenei, an event whose full market implications will unfold in the week ahead. Meanwhile, credit markets showed notable stress, with high yield spreads widening 29 basis points to 277 bp — the largest single-week widening in several months — as private credit concerns stemming from the Blue Owl OBDC II situation earlier in the month lingered.
Treasury Yields February 2026: Duration Dashboard
| Maturity | Feb 20, 2026 | Mar 1, 2026 | Weekly Δ | 5-Year Percentile |
|---|---|---|---|---|
| 2‑Year | 3.48% | 3.38% | −10 bp | 27th %ile (middle range) |
| 5‑Year | 3.65% | 3.50% | −15 bp | 32nd %ile (middle range) |
| 10‑Year | 4.09% | 3.94% | −14 bp | 49th %ile (middle range) |
| 30‑Year | 4.73% | 4.61% | −11 bp | 72nd %ile (middle range) |
Bull Flattening: Belly Leads as Growth Concerns Take Hold
Curve Analysis: The rally was most pronounced at the 5-year tenor (−15 bp), reflecting the market's view that growth expectations need to be revised lower following the Q4 GDP deceleration to 1.4% and the PPI's signal of embedded services inflation. The 2s30s spread held roughly flat at approximately 124 bp as both ends moved together, while the 2s10s spread narrowed modestly to 56 bp from 61 bp, suggesting a mild flattening bias. The 10-year's close at 3.94% marks its first week below 4% since November 2025, returning to a zone last consistently occupied in late 2024.
Treasury yields declined across all maturities this week as the fixed income market processed a challenging mix of signals. The January Producer Price Index — released Friday, February 27 — printed stronger than expected at +0.5% headline and +0.8% for final demand services, the largest services increase since July 2025. Yet rather than pushing yields higher, the PPI data contributed to a Treasury rally as investors interpreted the combination of persistent inflation and the previously released Q4 GDP growth deceleration to 1.4% as evidence of a stagflationary dynamic that reduces the Fed's flexibility and supports long-duration Treasuries as a defensive allocation.
Treasury supply was a secondary consideration during the week. The $70 billion 5-year note auction on Tuesday attracted modestly below-average demand following President Trump's State of the Union address, and the $44 billion 7-year note auction on Thursday drew slightly below-average participation, consistent with the tepid investor appetite for intermediate maturities given the uncertain rate outlook. Despite this, the flight-to-quality dynamic dominated, and yields ultimately finished the week lower across all tenors. Notably, this is the first week in which the January CPI's bull-flattening narrative from our February 15 report received confirmation from the producer price side, though with the stagflationary wrinkle now more prominent.
Credit Markets and Treasury Yields February 2026: Credit Pulse
| Metric | Feb 20, 2026 | Mar 1, 2026 | Weekly Δ | 5-Year Percentile |
|---|---|---|---|---|
| IG OAS | 72 bp | 83 bp | +11 bp | 39th %ile (middle range) |
| HY OAS | 248 bp | 277 bp | +29 bp | 26th %ile (middle range) |
| VIX Index | 19.09 | 19.86 | +0.77 | 66th %ile (middle range) |
Credit markets experienced notable widening this week, with investment grade spreads rising 11 basis points to 83 bp and high yield spreading out 29 basis points to 277 bp. While both segments remain well within the middle range of their five-year historical distributions — high yield's 26th percentile is still tight relative to history — the magnitude of the single-week move in HY was among the largest since mid-2025. Contributing factors include the carry-over of investor unease from Blue Owl's OBDC II redemption halt (announced February 19), the AI-driven tech sector selloff that weighed on software-linked credit, and the late-week geopolitical shock from the Iran strikes.
The VIX's modest rise to 19.86, sitting at its 66th historical percentile, understates the intraweek volatility given that equity markets were already under pressure before the Friday PPI release and the weekend's geopolitical developments. IG's widening to 83 bp — still at only the 39th percentile — suggests investment grade credit remains well-supported, while high yield's more pronounced move warrants watching given its sensitivity to both economic growth expectations and risk appetite. Context from our prior week's report covering the Supreme Court IEEPA ruling is relevant: the tariff policy recalibration that followed that decision removed one source of uncertainty, but the economic growth implications of sustained 10-15% tariffs remain an overhang on credit fundamentals.
⚠ Weekend Geopolitical Development: Iran Strikes — Market Implications
Joint U.S.-Israeli airstrikes on Saturday, February 28 killed Iran's Supreme Leader Ayatollah Ali Khamenei, Iranian state media confirmed Sunday. Iran launched retaliatory strikes across the Middle East, targeting U.S. military bases in the region and Israel. Oil markets opened significantly higher, with crude oil expected to rise sharply given disruption risks to Iranian supply and broader Middle East stability concerns. This event occurred after Friday's market close and is therefore not reflected in the week-ending data above, but will likely be the dominant market driver when U.S. trading resumes Monday, March 2. Historically, major Middle East supply disruptions support Treasuries as a safe-haven asset while weighing on risk assets — potentially extending the yield rally, though the oil-inflation channel complicates the picture for rates.
US Macroeconomic Assessment – Growth Deceleration Meets Persistent Inflation
The defining macroeconomic story this week was the convergence of the Q4 2025 GDP advance estimate — released the prior week on February 20 — with Friday's January PPI data, together painting a picture of an economy growing materially more slowly while inflation in services remains sticky. Q4 real GDP growth came in at 1.4% annualized, down sharply from Q3's 4.4% pace, with the BEA noting that the October–November 2025 government shutdown subtracted approximately 1.0 percentage point from Q4 growth. Absent the shutdown effect, underlying momentum was closer to 2.4%, which complicates a straightforward stagflation interpretation but still represents a meaningful deceleration.
PPI adds to the inflation picture: Friday's January PPI release — itself delayed by several weeks due to the government shutdown's impact on BLS data collection — showed final demand rising 0.5% for the month, above expectations. The more notable component was final demand services advancing 0.8%, its largest monthly gain since July 2025. On a twelve-month basis, the PPI for final demand rose 2.9%. Core PPI (final demand less foods, energy, and trade services) rose 0.3%, extending its streak of consecutive monthly increases to nine months. These figures suggest that the upstream pipeline for consumer price inflation has not cleared, even as the headline CPI has moderated.
State of the Union sets fiscal backdrop: President Trump's State of the Union address on February 24 — the longest in recorded history at nearly two hours — struck an optimistic tone on the economy, pointing to lower core CPI (2.5% in January, its lowest since April 2021), job creation, and border security. Treasury markets showed a limited reaction to the speech itself, with the 10-year yield edging slightly higher to roughly 4.04% on the day before resuming its broader decline. The speech included proposals for government-backed retirement accounts, tariff replacement of the income tax over time, and requirements that AI data centers build their own power infrastructure — none of which represented near-term fiscal surprises.
Section 122 tariff framework in focus: Following the Supreme Court's February 20 ruling that struck down the IEEPA-based tariffs, the administration has been operating under a Section 122 of the Trade Act of 1974 framework, implementing a 15% global tariff. This statutory authority expires after 150 days without Congressional approval, a constraint that markets are beginning to price. Congress debated its role in tariff policy throughout the week, with several centrist members of both parties signaling interest in a more structured legislative framework. The tariff policy transition has removed the highest-end uncertainty around the 27% April 2025 peak tariff levels, but the 15% base rate still represents a meaningful inflation and trade friction factor.
Federal Reserve Policy Outlook
The Federal Reserve held its target rate at 3.50–3.75% at its January meeting, and the market's attention has shifted to both the timing of the next cut and the independence question surrounding Kevin Warsh's nomination as Fed Chair (effective May 15). This week's PPI data is unlikely to move the needle meaningfully for the March FOMC meeting — market pricing continues to reflect a hold through at least the first half of 2026, with the first potential cut priced for Q3.
The stagflation dynamic in the data presents a genuine policy dilemma. The Fed cannot easily cut rates when services PPI is accelerating, yet a 10-year Treasury yield that has broken below 4% for the first time in months suggests bond markets are beginning to give more weight to the growth deceleration than to the inflation persistence. FOMC minutes from February 18 revealed disagreement among members about the timing of the next rate adjustment, with some officials flagging the Q4 GDP deceleration as a concern and others emphasizing the persistent PPI signals. That internal tension is likely to remain unresolved until Q1 2026 data provide cleaner guidance. As noted in our February 1 report on the FOMC's January decision, the Warsh nomination adds an additional variable: markets will watch closely whether a Warsh-led Fed signals a different reaction function toward inflation versus growth tradeoffs.
Week Ahead: Iran Conflict and Key Data Releases
- Iran Conflict Developments (Ongoing): The killing of Supreme Leader Khamenei and Iran's retaliatory strikes over the weekend will dominate market attention Monday. Oil prices, safe-haven flows, and risk asset pricing will all be affected. The duration and scope of the conflict will determine whether this is a transitory risk premium event or a more sustained structural repricing.
- ISM Manufacturing PMI (March 3): February reading will give first indication of whether the early-year growth deceleration continued into Q1. The manufacturing sector has been under pressure from tariff uncertainty; a reading below 50 would add to stagflation concerns.
- February Employment Situation (March 6): The monthly jobs report will be the week's most consequential data release. Consensus expectations center on continued solid payroll growth, but watch for any impact from ongoing federal workforce reductions and tech-sector layoffs following the Block announcement.
- ISM Services PMI (March 5): Services sector health is critical given the PPI's services acceleration. A PMI above 55 alongside elevated services inflation would strengthen the stagflation narrative.
- GDP Second Estimate (March 13, scheduled): The BEA's second estimate of Q4 2025 GDP will revise the advance 1.4% figure. Revisions to consumer spending and investment components will clarify the extent to which the shutdown effect explains the deceleration.
US Economic Positioning and Global Context
The U.S. economy enters March 2026 in a position of genuine ambiguity — Q3's strong 4.4% growth has given way to a Q4 deceleration, the inflation pipeline remains pressured at the producer level, and trade policy is in transition following the Supreme Court's ruling. Relative to global peers, the U.S. growth profile remains competitive, but the gap has narrowed. The European Central Bank's ongoing easing cycle and China's comprehensive stimulus framework have supported their respective economies, while the dollar — which had been resilient through much of 2025 — faces new headwinds from the tariff uncertainty and political backdrop.
The weekend's Iran developments introduce a new variable. Historically, major Middle East escalations support U.S. Treasuries as a safe-haven destination and create upward pressure on energy prices. Should the conflict broaden or oil supply disruptions materialize, the U.S. faces a competing pressure: higher energy costs add to already-elevated PPI pressures, while the growth shock associated with a sustained military engagement and geopolitical uncertainty supports rate cuts. This dynamic is precisely the kind that creates the most difficult environment for fixed income positioning, as the directional implication for rates depends heavily on which force — oil-inflation or growth-slowdown — dominates.
Key Articles of the Week
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Prior Week's Report – Supreme Court IEEPA Tariffs Ruling: Duration & Credit Pulse – Week Ending February 22, 2026Mariemont CapitalFebruary 22, 2026Read Report →
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10-Year Yield Falls Below 4% on Stagflation Risk Following Hot Producer Prices ReadingCNBCFebruary 27, 2026Read Article →
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Producer Price Indexes – January 2026U.S. Bureau of Labor StatisticsFebruary 27, 2026Read Release →
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GDP (Advance Estimate), 4th Quarter and Year 2025U.S. Bureau of Economic AnalysisFebruary 20, 2026Read Release →
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U.S.-Israel Strikes Iran: What We Know as Markets Brace for TurmoilCNBCMarch 1, 2026Read Article →
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Ayatollah Ali Khamenei Is Killed in Israeli Strike, Ending 36-Year Iron RuleNPRFebruary 28, 2026Read Article →
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Treasury Yields Edge Higher in the Wake of Trump's State of Union AddressCNBCFebruary 25, 2026Read Article →
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Blue Owl Halts Redemptions at One of Its Funds, Deepening Selloff in Private Equity SharesReutersFebruary 19, 2026Read Article →
Frequently Asked Questions
Why did Treasury yields fall this week despite hot PPI data?
The January PPI's services acceleration (+0.8%) was interpreted alongside the Q4 GDP deceleration to 1.4% as a stagflationary signal — rising prices combined with slowing growth. In a stagflationary environment, Treasuries can still rally as investors reduce equity and risk asset exposure and seek safety, even if near-term inflation is elevated. The flight-to-quality dynamic, amplified by Friday's geopolitical developments in Iran, proved stronger than the inflation-driven rate-rise impulse.
What does the 10-year Treasury breaking below 4% signal?
The 10-year yield's close at 3.94% — its first sub-4% reading since November 2025 — reflects growing market conviction that the Federal Reserve's next move is more likely to be a cut than a hike, driven by decelerating growth rather than inflation alone. It also reflects the bond market's assessment that the tariff policy transition, following the Supreme Court's IEEPA ruling, removes some of the worst-case inflation scenarios from 2025. However, the 10-year at its 49th five-year percentile remains near the historical midpoint, suggesting the market has not priced in an aggressive easing cycle.
How could the Iran conflict affect fixed income markets?
A major Middle East escalation typically creates competing pressures for fixed income. Safe-haven demand supports Treasuries and pushes yields lower, while the oil price spike associated with potential supply disruptions adds to inflationary pressure that could eventually push yields higher. The net effect depends on the conflict's duration and economic impact. In the near term, flight-to-quality flows are likely to extend the Treasury rally, but a sustained conflict that materially raises energy prices would complicate the Federal Reserve's ability to cut rates and could limit how far yields can fall.
What is the significance of the Blue Owl private credit situation for credit markets?
Blue Owl's decision to permanently restrict traditional quarterly redemptions from its OBDC II fund — replacing them with pro-rata capital distributions — raised questions about liquidity risk in the $2 trillion private credit market. While the asset sale at approximately 99.7 cents on the dollar demonstrated manageable fundamental quality, the episode highlights structural vulnerabilities when retail-oriented private credit vehicles face redemption pressure alongside declining valuations in software and AI-linked lending. The 29 bp weekly widening in HY OAS suggests the credit market is beginning to price in some incremental risk premium from this dynamic.
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