Insights 
VT 
The Federal Reserve’s Monetary Policy Report has been released, noting several key points. Treasury trading remains orderly but thinner, while risk-asset liquidity dipped due to tariff concerns.
Market liquidity shows improvement but is very receptive to trade-policy news. This year, equity, corporate-bond, and municipal bond liquidity experienced deterioration. Treasury trading early in April was stable but lacked depth, similar to early 2023.
Effects Of Tariffs
A slow start to 2025 is largely due to adjustments related to tariffs which have affected household and business confidence. There has been a broad decline in the dollar’s exchange value, although financial stability remains “resilient” amidst uncertainty.
The current policy stance is deemed appropriate for the future, with the full impact of tariffs still unknown but early signs show they add to price pressures. Inflation remains elevated, but the labour market continues to perform well.
Reading through the Monetary Policy Report, it’s clear that while trading in government securities hasn’t run off the rails, there’s less bulk going through the pipes. Fewer participants or lighter order books can mean sharper price moves even on small trades—something we’ve seen before. Risk assets, from equities to high-yield bonds, have become more jittery, and market depth is still touch-and-go. Liquidity, although picking up compared to last quarter, is still fragile and practically twitches at the hint of tariff updates. That’s not unusual. The stickiness in pricing big trades and slower quote updates suggest plenty of traders are hedging bets or sitting out altogether unless there’s a very clear upside.
What stands out is the cross-asset tightening in liquidity throughout this year, with stocks, corporate bonds, and state bonds each walking a narrower path. And while Treasury activity in April ticked along without any panic, the shallowness in depth makes it harder to carry or shift positions without impact. That mirrors what occurred around the same time last year, so it’s not an outlier, but it still demands tight execution control.
Market Outlook
We’re observing that the year ahead begins with some drag. That’s mostly coming from the tariff-driven dislocations. The reliance of many businesses—and homes—on cost stability has been tested, and neither sentiment nor spending appears to have recovered fully. With the greenback trending downward, dollar-denominated demand has adjusted accordingly. We don’t yet see clear dominoes, but that shift is being watched closely.
Despite all of this, systemic stress remains low. Liquidity facilities are not being overused, and borrowing spreads are not flashing red. Even so, Powell’s comments suggest rates are being held where they are for good reason. Tighter conditions are nudging inflation from multiple angles. In particular, trade policy costs appear to be making their way into pricing structures earlier than usual. That’s no surprise—adding to logistics and input costs eventually feeds into retail and wholesale figures.
Meanwhile, the jobs market is still offering steady payroll growth and job openings data remains elevated. That provides confidence that there’s still room for consumers to spend, which in turn underpins company earnings—even where margins are thinner.
Given this combination of conditions, most of what we’re trading on now involves balancing event risk with carry and positioning. The backdrop puts a premium on timing and convexity, especially for shorter-dated structures, as slight shifts in inflation readings or policy statements move front-end pricing quickly. With term premiums still at relatively low levels, we find hedging costs tolerable, though longs must be scaled carefully over periods of potential volatility—any hint of fresh trade actions or supply chain changes could swing implieds in minutes.
For those of us who track derivatives closely, the report effectively tells us that the path forward is less about reacting to headlines and more about shaping exposure with scenario-adjusted views. Tariffs, inflation readings, and confidence indexes become the weight we now assign to calendar spreads, gamma exposure and curve risk.
