April fourteenth, twenty twenty-five to April seventeenth, twenty twenty-five

I. Foundation 

resistance to change and hence greater dependability for the results shown in the past.

Global liquidity (V): the two-dimensional liquidity structure and yield convexity

More is happening. Continuing from the previous discussion, term premiums across the system are gradually climbing, The key question now is: how will the credit market be affected, and what does that mean?

The image above is yesterday’s article from the FT corporate-bond section. What we mentioned in Notes 250327, “Locating America (II): Early Signs of Systemic Risk,” is now intensifying.. We have been watching corporate credit for the past few years, and the market is finally beginning to show the long-awaited price-discovery signals..

Figure: Notes 250327 Locating America (II): Early Signs of Systemic Risk

Once again, we anticipated the trend early, and the reason is simple: if everything were “normal,” outliers would not appear, In other words, when an outlier appears within a system, it is bound to expand and persist..

Corporate bond performance shows that the market is indeed deteriorating rapidly, especially at the tail end of the credit chain. This in fact points to what we have been following closely The two-dimensional liquidity structure: first, the supply of liquidity itself (flow); second, how liquidity is deployed into risk assets (deployment). Both are equally important. Market discussion focuses mainly on the former, while the latter is in fact key to monitoring liquidity today, yet few people pay attention to it.

At present, total systemic liquidity has not declined significantly, but its marginal momentum is weakening substantially. Within that, the efficiency of liquidity allocation to risk assets—the latter dimension—is deteriorating even faster.

This is essentially a question of the global risk cycle, which is roughly a 9-10-year medium- to long-term cycle—the way global capital allocates the proportions of risky and safe assets in portfolios. At present, US investors’ risk appetite has deteriorated very noticeably, far more than the global trend overall.You can pull the data yourselves and compare how the proportion allocated to safe assets has changed for US investors versus global investors; the result is quite interesting.

Why has US investors’ risk appetite deteriorated so sharply now?

The prevailing explanation is uncertainty over tariff policy. That explanation is indeed valid to some extent, But the lack of alignment between global investors and U.S. investors reflects an issue on another level. We have repeatedly emphasized that alignment is very important to us; it is an important foundational awareness in our overall macro assessment.

If it were “only” a tariff issue, global investors should show a synchronized deterioration in their behavior with U.S. investors. The fundamental reason for the current lack of alignment is still that the U.S. economy is truly deteriorating and weakening.

Ultimately, this brings us back to the structural issue raised in the entire liquidity series of Notes: the weakening of America’s hidden stimulus.

Chart: Notes250407 Powell and Yellen’s trick: “Pump and Dump”

Another core early-warning indicator of credit-market risk is the spread between B-rated and AAA-rated corporate bonds.Generally, the wider this spread, the higher the market’s expected credit or default risk.

There is another internal indicator frequently used on Wall Street:A measure that represents the convexity of the U.S. Treasury yield curve, also called the butterfly spread, used to measure how far the yield on 5-year Treasuries deviates from the average of the 2-year and 10-year yields.

Once yield-curve convexity starts to surge, it is often an early warning sign of a weakening economy and deterioration in credit markets.

That is exactly what we are seeing now: convexity has suddenly risen, credit spreads have widened, and credit markets are beginning to deteriorate materially.Corporate bond yields have even broken through the government-guaranteed MBS rate, which is highly unusual. Even looking back to 1979, this kind of pricing inversion had never occurred, if U.S. economic growth falls from 7% to 3-4%, the credit market will struggle to bear this repricing.

More importantly, as we have said before, the credit market itself underpins the financial system’s collateral base, supporting the entire Collateral System....

And credit spreads are effectively the market’s pricing of default probability at any given time.

Next time, we’ll discuss credit spreads and the Collateral System behind them.

2025.04.15

A follow-up on the structural reasons behind low credit spreads and yields overall: the collateral base, the shortage of credit-asset supply, and the Fed’s decision-making system

The Collateral System of financial markets is directly tied to the Fed’s decision-making system. One could even say that, for a long time, the Fed’s decision-making system has structurally helped keep spreads low, the Fed’s direct intervention to buy CP in 20 stunned many people, also It was from then on that a new consensus became embedded in the credit market:If things get bad enough... the Fed will buy it...This is precisely what has caused credit spreads to remain compressed over the long term.

Apart from this fundamental issue of consensus, there is another important reason behind the structural factors keeping credit spreads and yields low overall—A lot of corporate debt was termed out during the pandemic, while afterward there were too few credit assets available for new purchases in the market, and new bond issuance was also very low.

A long-term comparison of the U.S. ISM manufacturing index (PMI) with credit spreads shows that their movements broadly tracked each other over the past several decades, until this relationship began to break down in the last five years.During these five years, PMI has remained very weak, yet credit spreads have continued to compress. This makes no logical sense; there is a pricing dislocation.

This also shows that an “abnormal structure” has emerged in the system, with a supply-demand imbalance, especially a shortage of credit-asset supply.

2025.04.16

II. Insights 

Our Viewpoints and ideas on market.

India: A relatively safe haven

During a week when global equity markets were volatile amid heightened tariff uncertainty, the NIFTY index was essentially flat week over week. Our exploratory position in India remains in profit, so there is no need to panic. Our core position itself has no stop-loss; the reassurance is directed at everyone in the group. Regardless of one’s view, being in profit is what allows many people to hold on.

From our current perspective, India is effectively a relatively safe haven.According to Bloomberg data, iPhone production in India will grow by 60% by the end of 3. Currently, 20% of phones are made in India, including high-end Pro models. Indian banks are also a sector worth watching.

Chart: India’s total exports to the United States are among the lowest of emerging-market countries and regions

For related reading, Notes250313 the India trade may look

The Reserve Bank of India cut its policy repo rate by 25 basis points to 6%, while also shifting its policy stance from neutral to accommodative, marking a clear dovish turn in monetary policy, There is likely to be at least 50 basis points of room for easing over the rest of this year, which means the easing cycle could be deeper and faster than the market expects.

The 4QFY25 earnings season is about to begin. This is a very important earnings season, and we will closely monitor several major sectors, including autos, banks, fast-moving consumer goods, and information technology.

If the indices fail to rise from here, we will prioritize shifting the portfolio toward domestic Indian exposure and defensive sectors, as a core defensive position in Asian markets.

2025.04.14

The elusive extremes, alignment, and the U.S. March inflation report

Everyone knows the risk indicators have deteriorated significantly; what matters in the actual market is really the issue of extremes. Since the various indicators show roughly similar results, I’ll use GS as a proxy here. Goldman Sachs’ proprietary risk appetite indicator has fallen sharply, but has not reached an extreme level. Hoping for the so-called The prospect of a rapid drop all the way to the bottom may not exist; that is actually worse, as it means a longer period of range-bound consolidation and decline.

Chart: Risk indicators have not reached extreme levels

 Chart: Market stress in the microstructure has not reached an extreme either

Chart: The consumer confidence index is now a basis for some people to buy the dip

The latest confidence index made the FT front page and is now a basis for many people to buy the dip—according to xx statistics, the current probability of buying the dip over a 6-12-month time horizon (roughly the same for most) offers a reasonable risk-reward profile. There is little risk in stating this view, because it will take a year to validate it, For us, at least for now, extreme readings without confirmation from aligned signals are not actionable.

Chart: Views on inflation by political party

The aligned view is not in the U.S. equity market, but elsewhere.

The views of the political parties on inflation are now moving in the same direction, and the Republican view is also shifting, which means The certainty in U.S. markets lies not in equities, but in bonds.

Chart: Last week, the 30-year bond yield rose by 46 basis points, closing at 4.87%.

In line with sentiment indicators, the bond market posted its largest one-week gain in terms of market performance since 1987 (38 years ago). 

Chart: More details

Breaking down the intraday chart, the better-than-expected CPI and PPI reports (green) had no effect on the U.S. ten-year yield. Meanwhile, although the University of Michigan survey report (red) was worse than expected and sentiment collapsed (severe economic slowdown or recession), nothing stopped yields from rising to the day’s high.

The reason the data do not matter is:The March inflation report was the last pre-tariff data release.

Now, we have entered a new tariff world.

Tariffs will not be the main market theme over the next few weeks; Trump and the administration in power will play down the impact of tariffs on the market, U.S. equities will certainly keep seesawing, seesawing, seesawing; sell intraday event-driven rallies.

The shift toward the bond market means the point of tension will center on the increasingly unavoidable conflict between Trump and Powell, the Fed will continue to resist calls to buy bonds, while Powell, for his part, actually wants to make his mark in the history of monetary policy, and what he wants to be is Volcker, not Burns:

While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent. Avoiding that outcome would depend on keeping longer-term inflation expectations well anchored, on the size of the effects, and on how long it takes for them to pass through fully to prices. Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.

—— Powell April 4th speech

Chart: The probability of a rate cut in May closed at 24% last Friday

Rising yields = tariff-driven inflation is coming + a possible resulting recession + rate cuts are not on the Fed’s agenda

2025.04.14

How China can fully emerge from deflation: the monetary anchor and signals of asset-price restructuring; a discussion of this round of Chinese bonds and renminbi-priced gold, the true underlying theme of the PBOC’s actions, and another possibility for gold’s rise (including a projected target price)

First, the conclusion:China is carrying out a profound shift in monetary and fiscal policy. The course of this policy transition is clear: it is being implemented jointly through Chinese bonds (China’s safe assets), Chinese risk assets (equities and property), and renminbi-priced gold, forming a path to monetary repair in the post-crisis era.The true signal of asset-price revaluation is neither the renminbi–U.S. dollar exchange rate nor the interest-rate path, but gold—the price of gold in renminbi is China’s true monetary anchor.

The starting point of this sequence of developments can be traced back to the second half of 24. At the time, the U.S. dollar strengthened amid Trump’s growing campaign momentum, and the dollar index briefly surged. China, meanwhile, faced a typical deflationary shock driven by external demand. This was compounded by widespread disappointment after the “Double Rocket” stimulus (monetary and fiscal policy working together) anticipated following the “October Eleventh Trade” failed to materialize. The first signal came from the sharp plunge in the yield on China’s 10-year government bonds. This line clearly collapsed at the end of last year.

The backdrop to this plunge was Trump’s election victory. China was naturally concerned about a new round of tariff wars, but the more direct reason was that, to defend the renminbi exchange rate against a soaring dollar, the PBOC slammed on the brakes.

At the time, the dollar index surged toward 110, reaching a new interim high.

This put broad pressure on non-U.S. currencies worldwide, with the renminbi under the greatest pressure. The authorities therefore adopted extremely forceful monetary tightening to stabilize the exchange rate. The result was that the economy at one point entered a tailspin, once again showing signs of debt deflation. Against this backdrop, given the overall highly leveraged structure, investors shifted wholesale into safe assets such as government bonds and away from all risk assets.

The plunge in the 10-year government bond yield was extremely rare in the history of Chinese bonds, especially given that it happened in a very short time, Clearly, this was not a natural correction in market interest-rate expectations, but a collapse in the term premium caused by systemic panic. In other words, most of the yield movement resulted from investors rushing into safe assets, rather than from a change in policy expectations.

After that, several important changes began to unfold one by one.

First came a temporary pullback in the dollar, which gave China some room to ease. Senior officials then signaled a “pro-capital” stance, particularly through frequent meetings with private-sector entrepreneurs, which the market viewed as a clear policy turning point. Over the following weeks, yields in China’s bond market rebounded rapidly, Corresponding to the earlier plunge, this was a recovery in the term premium, indicating that capital was beginning to flow back from safe assets into risk assets. This brought a full round of bond-market positioning to a close, and it was also the core underlying force behind the strength of China’s stock market in this cycle.

Beyond the shift in policy tone, the central bank is also acting at full speed. The PBOC’s net liquidity injections into the system If annualized, it would amount to approximately 20 trillion yuan. At today’s exchange rate of 7.3, the net stimulus totals about 2.75 trillion dollars. This is a very large monetary injection, comparable in scale to the first round of QE after the U.S. financial crisis of 2008.

In other words, China has now embarked on a path similar to “post-crisis monetary repair.” At the same time, property prices in first-tier cities and some major second-tier cities have begun to stabilize after falling and are even starting to recover. The true intention of this operation is to use monetary inflation to achieve systemic debt devaluation and asset repricing.

Another front is the gold market. The true direction the market should focus on now is not the renminbi–U.S. dollar exchange rate, but the price of gold in renminbi. For China to escape the logical trap of debt deflation, it needs to keep pushing the renminbi gold price higher, and that is exactly what the entire system has been working hard to do for some time.In other words, gold priced in renminbi is China’s true monetary anchor and the signal of asset-price restructuring.

In a debt-deflation structure, the only way to clear the system is to “devalue paper money.”

Debt deflation stems from an excessively high debt-to-liquidity ratio (about 30% above steady state). The only way to clear the system is to release liquidity and lower real interest rates, allowing asset revaluation to revive risk appetite. The anchor for this process is the renminbi gold price.The gold bull market is, in fact, the core trade for betting on China’s emergence from deflation.

Only by releasing sufficient liquidity, carrying out monetization, and creating monetary inflation can the “debt/liquidity ratio” return to a normal range, and the result is a real reduction in the debt burden. The true anchor for this “devaluation” is not the renminbi–U.S. dollar exchange rate, but the renminbi’s depreciation relative to “real assets”—with gold as the most important “real asset.”

In other words, the rise in gold priced in renminbi reflects China’s systematic emergence from the debt-deflation structure.

And this is exactly what is actually happening now. Although market attention remains focused on renminbi–U.S. dollar exchange-rate fluctuations—and even the central bank appears to be doing the same—the true underlying course of events is the revaluation path of gold priced in renminbi.

There is an interesting debate here: namely, It may seem that China does not lead the renminbi gold price and that it is merely the result of a triangular conversion of the dollar gold price plus the exchange rate. But in fact, judging from structural trading in the gold market since the start of 24, the PBOC has been gradually taking control of market pricing. The trend over the past few months has clearly followed a more “Shanghai-led” path.

If the renminbi gold price is set under Shanghai’s lead, then, using the depreciation of 30%-40% since the end of 24 as the basis (with the debt/liquidity ratio about 30% above steady state), that implies (807-869) (25097.7-27025.9). Assuming the renminbi exchange rate remains relatively stable around 7.25~7.3, the resulting dollar gold price would be 3600 (3438-3727) dollars per ounce.

If Shanghai really is leading, this rally will probably be nearing its end sometime this year. We may first see a corrective decline, followed by a climactic blow-off surge at the top, and finally high-level volatility.

The market cannot understand why gold prices are rising, but what is truly driving this structural rally is the core of China’s monetary and asset restructuring strategy—the path of revaluing the price of gold in renminbi.

2025.04.17

III. Market Pulse 

Our latest Comments on the economic and market environment

Note: All content in this article is for reference only and does not constitute investment advice or serve as a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for making decisions.