May twenty-sixth, two thousand twenty-five to May twenty-ninth, two thousand twenty-five

I. Foundation 

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

The real problem in the Japanese bond market: supply and demand, not Bond Vigilantes

There are generally two reasons for a selloff in ultra-long bonds. The first is the so-called Bond Vigilantes, I looked it up specifically: in China, the term is translated as “bond vigilantes,” but actually The meaning is simple: some institutions that influence market pricing begin demanding higher yields as a warning about a lack of fiscal discipline..

This applies more strongly to U.S. Treasuries; applying it to Japanese government bonds is actually a bit of a stretch. At least so far, the market has not traded that way.

A large stock of Japanese government bonds is held by the Bank of Japan and the process of restoring the functioning of the domestic bond market is still under way. This means that, at least in the short term, Japanese government bonds will not see trading dynamics resembling those of Bond Vigilantes.

Another perspective is more fundamental and better reflects how the Japanese bond market currently works: the underlying issue is supply and demand...

The surge in current Japanese ultra-long yields is mainly being driven by an extreme supply-demand imbalance at the corresponding point on the maturity curve The Bank of Japan’s latest survey of bond market participants also supports this view (the “Bond Market Survey,” published by BOJ in 5, explicitly states that the functioning of Japan’s bond market is impaired).

Liquidity in Japan’s ultra-long bond market has fallen sharply, making it difficult for prices to form stably between buyers and sellers in a sufficiently deep market...

More specifically, at the “Bond Market Group Meeting” held by BOJ on 5 month 20 to 21, several participants expressed the view that the Bank of Japan should help restore trading activity in ultra-long JGB.

Participants noted:“Given the severe deterioration in liquidity in the ultra-long-end market, the BOJ should consider a range of flexible responses, including halting its bond purchase reductions, directly increasing purchase amounts, and even merging the duration buckets for maturities of 10 years and longer into a single bucket (merging of the 10y+ maturity buckets into a single bucket).”

However, BOJ clearly has limited room to address problems in the ultra-long market, because its overall plan to reduce JGB purchases cannot easily be changed, The deterioration in supply and demand in the ultra-long market stems from insufficient investment demand caused by structural factors, a problem the central bank fundamentally cannot solve.

Fiscal discipline is a macroeconomic issue that the government should address; the supply-demand problem in ultra-long JGB, meanwhile, should be addressed by the Ministry of Finance through changes to the issuance structure in its government debt management policy.

However, it can be expected that at the monetary policy meeting in 6, the Bank of Japan will need to issue an update to its bond purchase plan as a “mid-term assessment.” The plan should neither surprise market participants nor obstruct the Ministry of Finance’s debt management policy, and it should not further dampen market sentiment without cause.

Everyone should keep a close eye on this when the time comes.

The main point is to emphasize that U.S. Treasuries and Japanese government bonds are now trading on different logic. They are, of course, linked, but we still need to look at them from different perspectives.

2025.05.26

II. Insights 

Our Viewpoints and ideas on market...

The case for shorting oil prices (continued): a new paradigm, a new era, a new alliance... before oil and gas assets become stranded

The 1973 export embargo ushered in the age of energy security, With the world highly dependent on external oil supplies, OPEC monopolized oil prices. Whenever gunfire broke out in the Middle East, it could easily impose a “geopolitical risk premium” on markets, with no one able to stop it.

But times have changed... by 2025, the global energy supply landscape had shifted, so that oil prices(adjusted for inflation)were even below the level in 1973 10 (then 11.65 dollars per barrel, compared with 11 dollars now)Thanks to exploration technology, abundant capital, and mature infrastructure, oil development and marketing are now highly efficient...

And “peak global oil demand” has become a new, unshakable certainty.

The United States is now the world’s largest energy producer; the logic is no longer that of an importer but of a dominant player.OPEC has long been marginalized; Venezuela and Angola have exited, Algeria’s fiscal breakeven is now 125 dollars per barrel, and Russia continues to increase production. In fact, Iran is now more prominent for its nuclear weapons and terrorism, while 400 million barrels per day carries no pricing power..Any disruption to oil supplies can be rapidly offset by other producers.

Meanwhile, at the beginning of 5, Trump’s visits to Saudi Arabia and the UAE marked the opening of a new alliance:

The key is not where the money is, but where it is going...

Saudi Arabia (1200 ten-thousand barrels) + the United States (2110 ten-thousand barrels) + Russia (1100 ten-thousand barrels) together account for nearly 50% of global production... Trump’s lavish reception in the Middle East reflects, in essence, the formation of a new axis of energy-producing nations...

The common task of the major oil-producing countries today is to monetize their assets early and in an orderly way before oil and gas assets become “stranded assets,”

No one wants to follow in Venezuela’s footsteps.

On his first day in office, Trump declared a national energy emergency, established an 28-day approval process, repealed emissions standards for gas-fired power plants and the gas cap, lifted restrictions on ANWR, and pushed hard to boost crude oil and natural gas production and exports. As LNG export terminals are completed and pipelines continue delivering natural gas to power plants and AI data centers, the dual drivers of Electrification + gas will become an irreversible trend for decades to come.

The history of energy paradigm shifts is repeating itself.

2025.05.27

The focus may be fiscal rather than monetary: the paradox of high deficits and high interest rates (the Fed has already been pushed to the very end of the decision-making chain)

The United States is currently operating amid an epic fiscal deficit. We have already had a series of discussions on the platform about the budget-cut debates in 2 and early 3...All these figures are almost negligible compared with the overall size of the fiscal budget—

More importantly, from the perspective of macroeconomic accounting identities, public-sector deficits = private-sector surpluses.

The result of the government’s massive liquidity injections is that liquidity flows directly into the real economy, substantially delaying the downside shock the economy might face. In fact, if tariffs really end here, this recession could even very likely be avoided...

We live in a nominal economy, which means Even if real growth slows, as long as fiscal stimulus sustains nominal growth, consumption and employment will not collapse, and the economy will not enter a typical recessionary trajectory.

This is a very unusual macroeconomic environment:

1）The Federal Reserve holds steady with the intention of restraining an overheated economy; 2) meanwhile, the bulk of the fiscal deficit is actually interest expense; 3) and that interest expense ultimately flows back to the private sector (bondholders), thereby in turn boosting consumption and investment..

The Fed is trying to “restrain” the economy with high interest rates, but those high rates are “returned” to the market through the fiscal deficit, effectively creating a second round of stimulus...This raises the bar for a recession substantially, as long as the deficit is maintained or continues to rise, unless an extremely severe exogenous shock occurs, the U.S. economy will continue to post nominal growth, and asset markets will continue to price in the possibility of a reacceleration.

Figure: Earlier discussion

The key to fiscal dominance will return to the bond market...In fact, We discussed this long-end issue a month ago. At that time, the market’s main focus was still on tariffs, while the risk of Bond Vigilantes was already on our table...(What we were looking at a month ago is now a topic the market is discussing intensely.) We will stay ahead of the market.

Figure: Notes250428 Another macro-level (counterintuitive) but more likely combination of paths

With debt and deficits persisting, the Fed has effectively been pulled to the very end of the decision-making chain—it no longer has the forward-looking ability to “turn off the music before the party starts”... The Fed’s actions are constrained by the bond market and the data; the bond market is controlled by the deficit, while the data lag policy or are distorted by noise...

The only timely sentiment data cannot serve as a basis for action either..

Paying attention to nominal values will be especially important this year.

2025.05.28

Data: falsehood, misjudgment, and echoes

There are lags between different sectors of the economy, and market data also lag,

The data we see today are actually echoes of past behavior; they are not the same as the current reality.

At the beginning of the month, the news that the U.S. GDP had posted negative growth made the front pages of major media outlets. There was much market discussion at the time; we didn’t talk about it then. It’s clearer now, so we can discuss it...

Viewed from today’s perspective, This negative growth looks more like a false reading; many data points are like this, and looking only at the result itself cannot provide genuinely meaningful insight.The negative figure was mainly caused by net exports: the surge in imports in the first quarter effectively reduced the net-export component. This is entirely explicable from a trade perspective...

Behind GDP, the link to the real economy is not so direct.. This was also mentioned in the Notes a few days ago... 

Figure: Notes250514 The awakening of the silent majority and the polarization of the median voter

Ultimately, data results are the result of behavioral choices. If we do not identify the behavioral choices behind them and simply look at the data and draw charts, that is no different from inferring causes from outcomes; searching for C using an incorrect B will only produce an incorrect result (in fact, the result “you want to get”).

Returning to GDP; following the negative figure in the first quarter, today the Atlanta Fed’s GDP Now model shows second-quarter GDP annualized growth back around 2.2%... It is actually obvious: reality is far less dramatic.

See through the noise to become immune to every “shocking headline.”

2025.05.28

Data (Part Two): Is it really reliable? The case of employment data

Yesterday, Xingzhi’s U.S. market notes took a look at the latest labor market data:

 U.S. Market Session Notes:https://www.meridianresearch.app/home?product=us-strategies

It is worth noting that among respondents, the share who said the share who said it was difficult to find a job rose to 18.6%... (diverging from the unemployment rate)

Here, let’s use this data to continue discussing data noise; for the earlier discussion, see Notes250528 Data: falsehood, misjudgment, and echoes, Read the one dated 28 first, then come back to this piece.

The market has remained focused on initial jobless claims. Today’s latest release showed little overall change and was not far from market expectations,

However, behind the reassuring data lies a false sense of security...

The data have not yet reversed, which does suggest that employment appears fine on the surface,

But In fact, a “recessionary labor market” without large-scale layoffs can occur, and it has happened before..This kind of recessionary labor market is not actually inconsistent with the “low unemployment” we discussed before, because people are indeed not unemployed... but the labor market has also not actually “improved”..

Around 00, Companies did not lay off workers on a large scale; instead, they chose to slow hiring significantly,

Eventually, nominal spending slowed, while the impact of weak CapEx also began to accumulate...but The labor market as a whole did not experience a “traditional collapse” at the time...

This also led to what later became known as a “jobless recovery”

——Because there were no mass layoffs, when the economy began to recover there was no “labor gap” that needed to be filled quickly, and naturally there was no large-scale hiring.

Returning to today, initial claims are relatively stable, but continuing claims are rising steadily...

Figure: Notes250513 Unemployment-rate logic and credit assets

The labor market remains in a state where it truly “isn’t laying people off” but also “isn’t hiring”—and if this situation lasts too long,(and it is highly likely that it really will last too long)it will naturally create delayed recessionary pressure on the overall economy.

Everyone knows what happened after the 00 data.

Figure: Retrospective review (03)

Behind our understanding of data, you need to maintain a framework without becoming trapped by it.

Market narratives always swing between extremes, while the real trading opportunities lie precisely among lags, echoes, and the market’s misjudgments.

2025.05.29

III. Market Pulse 

Our latest Comments on the economic and market environment

Note: All content in this article is for reference only. It 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 decision-making.