The Big Idea

The lingering price of Liberation Day

| May 9, 2025

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

Liberation Day has changed global markets in equities, rates, foreign exchange, credit and options. Those changes seem to reflect lower expectations for global growth and earnings, a rotation of debt capital out of the US and lingering uncertainty about where things go from here. The impact has not disappeared, which means markets still are worried.

Equity returns

Equity market returns suggest Liberation Day has lowered global expectations for growth and earnings. US markets underperformed other major global markets except Japan before Liberation Day and have since seen other markets join its decline (Exhibit 1). US markets in February and March had to price in bearish news of tariffs on Canada, China and Mexico and new tariffs on all imported steel and aluminum.  Europe meanwhile priced in bullish news of significant new fiscal spending by Germany and potential new defense spending by other countries. Asia was mixed with Japan down and China up. But since Liberation Day, most indices have dropped further across markets with the exception of the NASDAQ, the DAX and the Nikkei. Tariff exemptions for some of the biggest technology companies may be helping the NASDAQ, and Germany’s fiscal plans may be buoying the DAX.

Exhibit 1: Equity market returns before and after Liberation Day

Source: Bloomberg, Santander US Capital Markets

Global sovereign rates

Liberation Day has also triggered a significant pivot in global rates consistent with allocation of debt capital away from the US. The US saw a drop in rates across the yield curve before Liberation Day with German and Japanese curves generally rising and steepening (Exhibit 2). After Liberation Day, the US curve has pivoted to higher and steeper yields while Germany and Japan have pivoted to lower and steeper curves. This pivot could reflect changing expectations for growth, inflation and monetary policy across these markets. But swap spreads in these markets—tighter spreads in the US and wider spreads in the EU—suggest it is not just fundamentals and monetary policy.

Exhibit 2: Rate changes before and after Liberation Day (bp)

Source: Bloomberg, Santander US Capital Markets

Foreign exchange markets

Foreign exchange markets show a steady drop in the value of the dollar both before and after Liberation Day (Exhibit 3). Devaluation before Liberation Day seems understandable as the interest rate difference between the US and other countries fell, reducing the advantage of converting local currency into dollars and investing in higher yielding US debt. But after Liberation Day, as the interest rate difference began to widen again, the US dollar might be expected to rally against other currencies. It did not. Since Liberation Day, the dollar is down against other free-floating currencies by 1.8% go to 5.7%. This is also consistent with rotation out of US dollar assets.

Exhibit 3: The changing price of $1 before and after Liberation Day

Source: Bloomberg, Santander US Capital Markets

Credit markets

Liberation Day has also broadly raised the price of credit. Spreads on US risk assets before Liberation Day suggest rotation out of credit and into agency MBS, with investment grade spreads wider by 15 bp, high yield by 47 bp and agency MBS tighter by 6 bp (Exhibit 4). Spreads on European credits before Liberation Day tightened by 2 bp. But after Liberation Day, all spreads have widened. Broadly wider spreads are consistent with falling expectations for growth and earnings.

Exhibit 4: Changing risk spreads before and after Liberation Day (bp)

Source: Bloomberg, Santander US Capital Markets

Options markets

Finally, options markets have a mixed message about the level of uncertainty among investors. Implied volatility for US equity rose nearly 24% before Liberation Day with implied volatility for US rates up more than 7% (Exhibit 5). After Liberation Day, implied volatility for US equity has remained slightly higher than before while implied volatility for US rates has dropped. Uncertainty remains elevated, although down dramatically from the peak just before the April 9 pause in US reciprocal tariffs.

Exhibit 5: Uncertainty before and after Liberation Day (% change)

Source: Bloomberg, Santander US Capital Markets

The path from here

The 90-day pause on US reciprocal tariffs ends on July 8, which means the news over the July Fourth weekend will probably be consumed with marking progress on negotiations ahead of the deadline. Work from the Peterson Institute shows that past trade deals have taken an average of 18 months to get done. This time may be different, but it seems unrealistic to expect more than a couple of detailed deals to get inked before July 8. That will leave the market to interpret the direction of travel at that point. We may have seen the worst on April 8 before the pause, but a lingering price of Liberation Day is almost certain to persist until July 8 and likely for a long time afterwards.

* * *

The view in rates

The market closed on Friday pricing fed funds at 3.65% to end the year, 22 bp below the Fed’s March dots. The steady reversal over the last few weeks of market expectations for cuts this year likely reflects a series of messages from Fed speakers about the risk of inflation from tariffs. The Fed looks prepared to wait until it has a better view of whether tariffs will bring a 1-time price change or more persistent inflation.

Other key market levels:

  • Fed RRP balances closed at $142 billion as of Friday, down on $6 billion in the last week
  • Setting on 3-month term SOFR closed Friday at 430 bp, up 6 bp in the last week
  • Further out the curve, the 2-year note traded Friday at 3.89%, down 4 bp in the last week. The 10-year note traded at 4.38%, up 7 bp in the last week.
  • The Treasury yield curve traded Friday with 2s10s at 49 bp, steeper by 1 bp in the last week. The 5s30s traded Friday at 83 bp, flatter by 4 bp over the same period
  • Breakeven 10-year inflation traded Friday at 231 bp, up 4 bp in the last week. The 10-year real rate finished the week at 206 bp, up 2 bp in the last week.

The view in spreads

Bearish on credit spreads with US trade policy in flux. The Bloomberg US investment grade corporate bond index OAS traded on Friday at 99 bp, wider by 4tighter by 7 bp in the last week. Nominal par 30-year MBS spreads to the blend of 5- and 10-year Treasury yields traded Friday at 152 bp, tighter by 6 bp in the last week. Par 30-year MBS TOAS closed Friday at 33 bp, tighter by 5 bp in the last week.

The view in credit

Tariffs should weaken most credits assuming slower growth, and hit specific credits hard based on exposure to cross-border trade flows. Excess returns from the first week of tariff war point to the specific sectors more or less exposed to tariff. We have been watching cracks in credit quality at the weaker end of the credit distribution for months. Fundamentals for the average of the distribution continue to look stable. Most investment grade corporate and most consumer balance sheets have fixed-rate funding so falling rates have limited immediate effect. Consumer debt service coverage is roughly at 2019 levels. However, serious delinquencies in FHA mortgages and in credit cards held by consumers with the lowest credit scores have been accelerating. Consumers in the lowest tier of income look vulnerable. The balance sheets of smaller companies show signs of rising leverage and lower operating margins. Leveraged loans also are showing signs of stress, with the combination of payment defaults and liability management exercises, or LMEs, often pursued instead of bankruptcy, back to 2020 post-Covid peaks. If the Fed only eases slowly this year, fewer leveraged companies will be able to outrun interest rates, and signs of stress should increase. LMEs are very opaque transactions, so a material increase could make important parts of the leveraged loan market hard to evaluate.

Steven Abrahams
steven.abrahams@santander.us
1 (646) 776-7864

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

Important disclaimers for clients in the EU and UK

This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.

This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.

This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.

This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.

The Library

Search Articles