One step closer — As we approach “Liberation Day” on April 2, anxiety is high about a potential new round of tariffs initiated by President Trump. Heading into last week, news headlines expressed concern that rising taxes on trade will dampen demand for the upcoming two-, five-, and seven-year Treasury-note auction cycle. We closed the week, however, with a strong two-year auction, followed by marginally weaker auctions for the five-year and seven-year tenors, which each tailed 0.5 basis points (bps).
Although the magnitude of the concessions isn’t out of the ordinary, less demand for the longer-tenor debt signals some angst among the investment community, likely over inflation. To the extent inflationary pressures persist at current levels—or markets forbid—rise higher, interest rates would climb, thereby making this past week’s Treasury buyers out of the money.
“I found bliss in ignorance,” sang rocker Chester Bennington. That sentiment could also apply to the current market mindset. Yet for better or worse, such blissful ignorance may be one step closer to ending, given the latest higher-than-expected inflation report.
The core Personal Consumption Expenditures (CPE) price index rose 0.365% in February—the third consecutive rise. Even though 2025 only has two data points, the PCE index is showing signs of nascent reinvigoration (Figure 1): After two years of mostly 0.25% monthly gains, 2025 is coming in around 0.34% per month (January was 0.3% and February was 0.365%). While the rise can easily be washed away if future monthly reports come in lower, it nevertheless warrants further monitoring.
Inflation has been increasing at a slower pace in the U.S. since the summer of 2022. And other countries have mostly followed suit since inflation’s global peak later that year. Figure 2 shows that except for 2022— a year marked by supply-chain problems—most monthly inflation gains in the U.S. have been attributable to service industries, the country’s engine of growth.
In mid-2022, inflation was the word of the day on Google (Figure 3). Today, it is tariffs. Meanwhile, the number of searches for inflation has retreated to roughly half of the 2022 peak. Tariffs have been historically much more popular globally, as illustrated by the worldwide inquiries running at roughly 40% of its newly reached all-time high for most of the past 20 years. Stateside, the term only became somewhat popular during the first Trump administration but remained well below the worldwide inquiries for much of its history.
Decades of globalization after World War II—as well as better monetary policy—helped synchronize inflation rates and interest rates at low levels in many countries. Figure 4 charts the quarterly change in world inflation (grey-dotted line), along with quarterly changes to the policy rates of many central banks, from June 2020 to February 2025. As inflationary pressures picked up in 2020 to 2022, central bankers increased rates, with a lag. Once inflationary pressures began rising more slowly, policymakers slowed their rate hikes or paused them altogether. Subsequently, inflationary pressures began to shrink, which allowed officials to lower rates eventually.
When it comes to rate changes, we now find ourselves in a period where central bankers around the world are mostly on hold. The Federal Reserve, for example, has maintained a wait-and-see approach in 2025, after cutting 100 bps in 2024.
When thinking about new tariffs, remember that the impact on prices will come primarily through goods, not services. But, as Figure 1 illustrates, goods-related inflation makes up a relatively small portion of overall inflation. On the other hand, members of the Federal Open Market Committee (FOMC) submitted forecasts just two weeks ago in which they projected slower U.S. growth, combined with higher inflation.
In contrast, Susan Collins, president of the Boston Fed and also an FOMC voter, recently said: “My kind of modal outlook would be that that [inflation] could be short-lived, with a continuation of some disinflation— but further in the future than I might have expected before.” Raphael Bostic, president of the Atlanta Fed, added: “I moved to one [interest-rate cut in 2025] mainly because I think we’re going to see inflation be very bumpy and not move dramatically and in a clear way to the 2% target.” And Fed Chair Powell revived the word “transitory” when asked about the downstream effects from tariffs to the economy.
At his post-FOMC meeting press conference, Powell did acknowledge the high degree of uncertainty resulting from President Trump’s unpredictable policy changes. But Powell also insisted that the Fed continues to be in no hurry to adjust borrowing costs—and will wait for greater clarity on the economic impact of the White House’s policy changes before acting.
FROM THE DESK
Agency CMBS — Fannie Mae new origination came in heavy at $1.35 billion last week, well above the year-to-date (YTD) weekly average of $825 million. Freddie Mac priced two new-issue deals totaling $1.2 billion last week; the market expects to see two more new issues totaling $1.05 billion next week. The volume was absorbed well—spreads remained relatively flat, week over week. Ginnie Mae volume was light again last week. Spreads moved sideways to a bit higher.
Municipals — AAA tax-exempt yields were higher throughout the yield curve, week over week. Housing-sector primary new issuance picked up last week, with several cash-collateralized deals pricing. However, the deals were met with spreads that were more than 10 bps wider compared to the week prior. Spreads are currently gapping out: It’s the time of the year when both bonds are sold to pay income-tax bills ($1.16 billion of fund outflows the last three weeks) and primary new issuance rises (up 25% compared to a year ago).
Municipal bond funds had a third straight week of outflows last week, with $573 million leaving (YTD inflows of $5.35 billion). The high-yield fund subset, though, continued to see inflows of $148 million. In the high-yield space, the $1.15 billion deal for a new tire factory in Oklahoma that we mentioned last week was delayed because of volatile market conditions.
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