Key Themes: Interest rate volatility, tariffs, market uncertainty, and hedging opportunities
Market Overview
- Treasury yields declined sharply last week; 2- and 10-year swap rates both fell around 30 basis points.
- The gap between the 2-year yield and the Fed funds rate suggests it’s a good time to hedge interest rate exposure.
- Despite the rally, yields remain higher than they were before the Fed started rate cuts in late 2024.
Federal Reserve & Inflation
- The Fed remains focused on inflation, despite strong job numbers.
- The market is currently pricing in over four rate cuts for 2025.
- Nonfarm payrolls exceeded expectations at 228,000, reinforcing economic strength.
Tariffs & Policy
- Recent tariffs sparked recession concerns but have not yet significantly widened agency spreads.
- Tariff strategy is based on trade deficits rather than matching other countries’ rates, complicating negotiations.
- Dozens of countries are reportedly in talks over tariff resolutions.
- Tax extension debates continue, with a wide gap between Senate and House proposals.
Fixed Income & Hedging Strategy
- Clients are exploring hedging opportunities due to the drop in rates and ongoing uncertainty.
- Falling rates have increased prepayment penalties, impacting refinance decisions.
- There’s a push to take advantage of favorable market conditions before volatility increases further.
Looking Ahead
- Key Treasury auctions and economic data (including University of Michigan sentiment survey) are expected this week.
- Corporate earnings reports may offer more clarity on how businesses are reacting to tariffs.
- Ongoing political and economic uncertainty means conditions could shift rapidly.
Final Message
- Use current market conditions as an opportunity to de-risk portfolios.
- Lock in favorable hedges while they’re available—don’t try to time the market.
