Weekly Mosaic Update

Top of Mind - Week of April 21, 2025

At the start of 2025, US equities weren’t alone in appearing fully valued: investment grade and high yield corporate credit traded at or near historically tight spread levels, while the securitized sector offered relatively attractive spreads.
Elevated uncertainty surrounding trade policy has since driven corporate credit spreads wider, improving valuations compared to much of the last year, with securitized spreads also widening.
Persistent uncertainty and the absence of new trade deals continue to fuel speculation about the direction of the economy and could continue to weigh on credit spreads.
Despite the possibility of further spread widening, the balance sheet strength of investment-grade corporate credit issuers remains strong, and the credit enhancement of the securitized sector positions both as compelling opportunities.

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Turbulence shifted from stocks to bonds last week. The S&P 500 spent much of the week rallying on the back of the announced 90-day pause in reciprocal tariffs, excluding China, sending the index up +5.7% for the week.
However, after an intraday plunge below 3.9%, the 10-year US Treasury rate exploded higher, nearing 4.6% late in the week. Concerningly, the US dollar weakened as rates rose, falling -3%. This combination is seldom seen in developed markets, let alone the US bond market.
It’s fair to speculate that the rapid increase in yields played an important role in the 90-day pause. The Administration has been abundantly clear that it wants lower interest rates. Credit spreads also widened, doubling the stress on corporate borrowing costs.
Over the weekend, short-term tariff exemptions were granted on several electronic goods and semiconductors, in another positive step toward de-escalation.
We expect volatility to remain high, but are gaining confidence that we have reached peak uncertainty. It’s likely that any further protest by the US bond market will be met with more accommodation by the Administration.

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Global equity markets were thrust into a policy-induced selloff after last Wednesday’s “reciprocal” tariffs announcement.
Policy uncertainty had been steadily rising since the middle of the first quarter and was turbocharged by the tariff announcement.
Volatility, as measured by the VIX, rose in concert with elevated policy uncertainty and hovered structurally higher throughout much of the first quarter, and also leapt much higher post-announcement.
While the risk of a recession has materially increased over the past week, markets will continue to seek clarity on policy from the Administration (delay and/or easing of tariffs), Congress (tax cuts), and the Federal Reserve (interest rate cuts).
This is an incredibly fluid situation with the potential to change rapidly. We remain disciplined and steadfast in our approach, closely monitoring ongoing developments and adjusting portfolios accordingly.

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For much of the last six weeks, policy uncertainty driven by tariff rhetoric has dominated headlines, shaping the market narrative.
Wednesday, April 2nd is the day circled on many calendars as Tariff Day, or T-Day, in which the administration is set to announce a litany of new tariffs on imported goods.
The lack of clarity and fluid nature of the tariffs that have already been declared, delayed, and/or withdrawn suggests that Wednesday’s announcements will likely be a starting point for negotiations.
The current effective tariff rate, as estimated by the Bureau of Economic Analysis, is roughly 2-3%. As details and negotiations unfold, the effective tariff rate is expected to trend toward a higher level by year-end, and markets will adjust accordingly.
Once policy uncertainty peaks, we anticipate that volatility in the equity markets will begin to recede as the administration transitions focus from tariffs to deregulation and tax policy.

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Following its second meeting of 2025 on Wednesday, the Federal Reserve (Fed) held the Federal Funds Rate steady at 4.25-4.50%, as expected, adopting a cautious stance to assess the impact of tariffs on prices before delivering further rate cuts.
The Fed’s latest Summary of Economic Projections (SEP) revealed a dimmer outlook than December’s, with lower GDP growth, alongside higher inflation and higher unemployment forecasts for 2025.
In addition, the Fed adjusted its balance sheet reduction program (quantitative tightening), reducing the monthly Treasury cap from $25 billion to $5 billion per month while maintaining a cap of $35 billion per month on mortgage-backed securities.
The Treasury just received price-agnostic buyer signaling that they will be buying nearly $200 billion more in Treasury securities this year than previously anticipated, an incremental positive for the Treasury market that is expected to have a massive level of issuance this year.

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On Thursday of last week, the S&P 500 officially entered correction territory, defined as a decline of 10% or more from its most recent high, in this case, since February 19th.
Elevated policy uncertainty, driven by a persistent focus on tariffs throughout much of the past few weeks, fueled fears of a growth slowdown. With equity markets priced for perfection, it didn’t take much to send stocks lower.
While the broad-based S&P 500 Index fell roughly 10%, many Mag-7 stocks that drove much of the returns over the last couple of years have dropped by 20% or more.
We believe the policy uncertainty fueling this pullback will subside, and we view the recent equity market correction as encouraging long-term development. Much of the froth in the market has been re-rated lower, creating opportunities for investors.

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