The landscape of the U.S. economy experienced some significant changes in the first quarter of 2025. The Trump administration began with a swift introduction of tariffs, mass government job cuts, and large-scale deportations of undocumented immigrants. Inflation remains a key concern, with projections showing inflation rates moving further away from the Federal Reserve's 2% target. Factors like tariff implementations and ongoing geopolitical instability contribute to this inflationary pressure, creating a challenging environment for monetary policy. Although the Federal Reserve was previously not expected to cut rates again within the first half of the year, the potential for tariffs driving up prices could necessitate a shift. In anticipation of this evolving economic climate, consumer spending on goods remains relatively strong, possibly as a hedge against future price increases, while service expenditures have declined, accompanied by a notable increase in personal savings rates. Many first quarter GDP projections expect negative growth, and warnings of stagflation loom. Geopolitical turbulence persists with the Russia - Ukraine and Israel - Hamas wars grinding on interminably. Oil prices are at $69/barrel.

The yield curve is now barely positively sloped. The 10-year Treasury is at 4.35, which is down 27bps from last quarter and up 6bps from last month. The one-year is at 4.10, which is down 10bps from last quarter and down 3bps from last month. The 30-year fixed rate mortgage is at 6.76%, which is down 18bps from last quarter and up 17bps from last month.

Prepay speeds remain low, although speeds on coupons above 6% are beginning to rise. The secondary market for servicing rights remains alive but cautious in its pricing.

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