April fourteenth, twenty twenty-five to April eighteenth, twenty twenty-five

I. Foundation 

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

Global Liquidity (Five): The Two-Dimensional Liquidity Structure and Yield Convexity

More is happening. Picking up where we left off, the system-wide term premium is slowly climbing, The key question going forward is: how will credit markets be affected, and what does it mean?

The image above is from yesterday’s article in the FT corporate bond section. What we mentioned in Notes 250327, “Identifying America (Two): 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..

Chart: Notes 250327, “Identifying America (Two): Early Signs of Systemic Risk”

We anticipated the trend early once again, 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..

The performance of corporate bonds indicates that the market is indeed deteriorating rapidly, particularly at the tail end of the credit chain. This in fact points to what we have been watching:A two-dimensional liquidity structure: first, the supply of liquidity itself (flow); second, how liquidity is deployed into risk assets (deployment). Both matter equally. Market discussion focuses mainly on the former, while the latter is in fact key to assessing liquidity today, yet few pay attention to it.

At present, total systemic liquidity has not declined significantly, but its marginal momentum is materially weakening. Within that, the efficiency with which liquidity is allocated to risk assets—the second dimension—is deteriorating faster.

This is actually a question of the global risk cycle It is approximately a medium- to long-term cycle of 9-10 years—the way global capital allocates the proportions of risky and safe assets in portfolios. At present, U.S. investors’ risk appetite has deteriorated very markedly, far more than the global trend overall.You can pull the data yourselves and compare how the safe-asset share has changed for U.S. capital versus global investors; the results are quite interesting.

Why has U.S. investors’ risk appetite deteriorated so sharply now?

The mainstream explanation is uncertainty over tariff policy, and that explanation is valid to some extent, but the lack of alignment between global investors and U.S.-based investors points to an issue on another level. What we keep emphasizing is that alignment is very important to us; it is an important fundamental principle in our overall macro assessment.

If it were “only” a tariff issue, global investors’ behavior should deteriorate in sync with that of U.S.-based investors. The fundamental reason for the current lack of alignment is still that the U.S. economy is genuinely weakening and declining.

Ultimately, this still comes back to the structural issue discussed in the Liquidity Notes series: U.S. implicit stimulus is weakening.

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 is, the higher the market’s expected credit or default risk.

Another internal indicator frequently used on Wall Street:A measure that can represent the convexity of the U.S. Treasury yield curve, also called the butterfly spread, measures 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 deteriorating credit markets.

That is exactly what we are seeing now: convexity has risen sharply, credit spreads have widened, and the credit market has begun to deteriorate in a material way.Corporate bond yields have even broken through the government-backed MBS rate, an extremely unusual situation. 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 withstand this repricing.

The more important issue is that, as we have said before, the credit market itself underpins the financial system’s collateral base; it supports the entire Collateral System....

Credit spreads are, in effect, 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

Continuing the structural reasons behind low credit spreads and yields overall: the collateral base, the lack of credit-asset supply, and the Fed’s decision-making system

The Collateral System in financial markets is directly tied to the Fed’s decision-making system. One could even say that the Fed’s decision-making system has in fact helped structurally suppress spreads for a long time in the past, the Fed’s direct intervention to buy CP in 20 shocked many people, and it was from that point onward that a new consensus became embedded in the credit market:As long as 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 consensus issue, another important structural reason for low credit spreads and yields overall is—Many companies had already termed out their debt 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) and credit spreads shows that their movements broadly tracked one another over several decades, until this relationship began to decouple in the past five years.During these five years, PMI has remained weak, yet credit spreads have kept narrowing. This makes no logical sense at all; there is a pricing discrepancy.

This also indicates an “abnormal structure” in the system and a supply-demand imbalance, especially a scarcity of credit-asset supply.

2025.04.16

A Beginner’s Guide to the Basis Trade

Last week, the Planet published an article titled Notes250410 Basis Volatility Is More Symptom Than Root Cause (Understanding the Basis Trade)an article (those who haven’t read it should be sure to do so). Quite a few readers were very interested in the details of the 20 events after reading it, so here I’ll provide some additional background again and break down the concepts from the previous article in a way that is easier to understand.

To understand “what is the basis trade, and why has it become so popular?”, we need to take a longer view of the timeline, going back from the market turmoil of 2020 to the regulatory reforms that followed the financial crisis of 2008.

After the trauma of the financial system coming close to collapse, regulators set out to make the banking system safer.They required banks to hold more capital to absorb potential losses while also substantially increasing their allocations to “high-quality liquid assets,” which can be sold quickly for cash in an emergency—U.S. Treasuries (US Treasuries) are one of the core assets in this category.

The positive side of these reforms is that the banking system did become more resilient; but they also had negative consequences—the space on bank balance sheets was squeezed, market liquidity declined, and banks became less willing to take on risk.This means, It became more difficult and more expensive for large institutional investors (that is, bank clients) to obtain financing from dealers.

Without leverage, clients’ means of enhancing returns are constrained. This is also a problem for banks:The smaller the balance sheet, the less risk capacity a bank can “rent” to clients, and the lower its business volume and commission revenue.

But Wall Street has always excelled at pushing back against policy, and it quickly found an alternative—the basis trade emerged.

This trading structure allows investors, especially hedge funds and active managers, to achieve two key things at once: the core idea is to go long cash Treasuries and short Treasury futures (that is, hedge the price difference).Investors finance the purchase of cash Treasuries through the repo market (repo market)—this market is the key channel through which institutions obtain short-term wholesale financing and liquidity, while shorting on the futures side. The profit comes from the spread between the two, producing a positive return after financing costs.

As for financing costs, because U.S. Treasuries are considered one of the safest assets, financing rates are usually low, providing the strategy with positive carry.

The moment of collapse:

In 2020 3, as the overall market collapsed, the basis trade went from being a solution to the problem itself.

At the time, banks were eager to reduce risk and shrink their balance sheets, and the leverage capacity they had previously “rented” to clients contracted abruptly—even though banks could earn a certain return from it, survival came first.

As a result, Banks withdrew across the board at almost the same time, directly putting hedge funds engaged in the basis trade in difficulty. They could of course choose to hold to maturity to spread out their losses, but the problem was that, without the financing and position-rollover mechanisms provided by banks, they could no longer “roll their positions” and were forced to close them.

This means, They could only sell large amounts of the cash Treasuries they held. But banks themselves were also unwilling to buy, and market liquidity fell into a “vacuum.” The yield on 10-year Treasuries then surged, and the Treasury market quickly plunged.

The crisis was only brought under control after the Fed stepped in. In 2020 3, The Fed announced a series of market-stabilization measures—it bought a total of about 1 trillion dollars in bonds and even began buying corporate bonds directly, and rolled out a whole set of liquidity facilities in succession: CPFF, MMLF, PMCCF, SMCCF, PDCF, PPPLF, MSLF… the list is very long.

This is also what we Notes250416 Continuing the structural reasons behind low credit spreads and yields overall: the collateral base, the lack of credit-asset supply, and the Fed’s decision-making system the operation described as the Fed stepping in to buy CP...

Only after the Fed stepped in did the turmoil finally subside.

2025.04.17

The overlooked corner: the Basel III endgame, New York–London gold delivery, and the story of the scramble for physical gold behind paper gold

Since the start of the year, huge amounts of gold have been aggressively imported from London into the United States. These imports even blew up the Atlanta Fed’s GDP Now model, forcing it to make a special gold adjustment to explain the statistical error properly.

Many people are talking about this, but there is very little valuable information. Some focus on tariffs, others on safe havens or the so-called sovereign reserve issue, but in fact, this is not where the U.S. banking industry as a whole is focused. They are more concerned about something else.

Starting this summer, under the new regulatory rules issued by BIS (the U.S. regulatory endgame rules), physical gold (bullion) will be treated as a “Tier One asset.”

The new agreement will be fully implemented in the United States on 25 7 1

This means:Major banks can no longer treat gold derivatives (such as futures and swaps) as Tier One assets; they must use physical gold instead.As a result, throughout the first quarter, a steady stream of gold futures and derivatives on the COMEX exchange began to be “redeemed” for physical gold, and the scale of clearing was astonishing.

The scale of physical gold delivery is unprecedented and has reached astonishing levels.

The normal delivery rule in the London gold market is “T+1”; at the start of the year, it became “T+6 weeks,” and at its peak the wait was as long as 8 weeks. Although things have eased somewhat by today, it still takes 2-3 weeks.

The Bank of England’s explanation for this is that London’s traffic congestion makes it impossible to transport the physical gold...

Let’s set aside for now whether this is really a liquidity problem in London gold or simply severe traffic congestion in London. If we continue the discussion,, it leads to something that London as a whole and the Bank of England are unwilling to discuss—the loss of London gold’s global dominance and pricing power.

Bailey’s comments“Eased”people’s concerns about gold leaving the UK..? Really?

Behind the tariff noise, the main thread of gold trading seems to be becoming clearer... This is a story about the scramble for physical gold behind paper gold... Who decided on the Basel endgame ruling requiring physical gold? Give it some thought.

“The Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (the “U.S. banking regulators”)recently published the much-anticipated proposal for the U.S. version of the Basel III “endgame” rules (the U.S. Basel III endgame rules) (the “Endgame Rules”).The Endgame Rules will be the most significant revision to U.S. banking regulators’ bank capital rules in more than a decade. The Endgame Rules will apply to U.S. banking organizations with total assets exceeding 1000 hundred million dollars (the “large banking organizations”). The Endgame Rules will take effect on 2025 7 1”

It is not only the United States that is bringing in physical gold; the East is also taking action, and all the major countries around the world are participating in this battle for physical gold..

You can read this part alongside our Notes from yesterday...

Notes250417 How China can break out of deflation once and for all: the monetary anchor and signals of asset price restructuring; a discussion of this cycle’s Chinese government bonds and gold priced in renminbi, the real story behind the People’s Bank of China’s operations, and another possibility for gold’s rise (including a forecast target price)

That’s all for gold for now. After reading several of the Planet’s pieces, it should be quite clear.

Next week, we’ll talk about something else.

2025.04.18

II. Insights 

Our Viewpoints and ideas on market.

India: A Relatively Safe Haven

During a week when global stock markets swung amid heightened tariff uncertainty, the NIFTY index was essentially flat week over week. Our pilot position in India is still in profit, so there’s no need to panic. We wouldn’t place a stop-loss on our core position in the first place; that reassurance is for everyone in the Planet. Whatever your view, being in profit makes it easier for many people to hold on.

From our current perspective, India is essentially a relatively safe haven.According to Bloomberg, iPhone production in India will increase by 60% by the end of 3. At present, 20% of the phones are made in India, including the 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 further reading, see Notes250313 India trade looks promising

The Reserve Bank of India cut its policy repo rate by 25 basis points to 6%, while shifting its policy stance from neutral to accommodative—a clear dovish turn in monetary policy, There is likely to be room for at least another 50 basis points of easing over the rest of this year, meaning 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 keep a close eye on several major sectors, including autos, banks, consumer staples, and information technology.

If the index cannot move higher later on, we will prioritize shifting the portfolio toward domestic exposure in India and defensive sectors, as a core defensive position in Asian markets.

2025.04.14

The extreme levels that never arrive, alignment, and the U.S. March inflation report

Risk indicators have deteriorated significantly; everyone knows that. What really matters in the actual market is the question of extremes. The results from the various indicators are all quite similar, so here I’ll use GS as a proxy. Goldman’s proprietary risk-appetite indicator has fallen sharply, but has not reached an extreme level. Hoping for the so-called the possibility of reaching the bottom in a single drop does not exist. That is actually worse, because 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 is also short of extreme levels

Chart: The consumer confidence index is the basis some people are using to buy the dip

The latest confidence index made the FT front page and is now the basis many people are using to buy the dip. According to xx’s statistics, the current odds of buying the dip offer a reasonable risk-reward over a 6-12-month time horizon (they are more or less all like this). There is little risk in expressing this view, because it will take a year to validate it. For us, at least from where we stand now, extreme readings without confirmation from alignment are not actionable.For us, at least from where we stand now, extreme readings without confirmation from alignment are not actionable.

Chart: Views on inflation by political party

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

The parties’ views on inflation are now moving in the same direction, and the Republican Party’s position is also shifting. This means The certainty in the U.S. session is not in equities, but in bonds. 

Chart: The 30-year bond yield rose 46 basis points last week, 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

Looking at the intraday chart in detail, the better-than-expected CPI and PPI reports (green) had no impact on the U.S. ten-year yield. At the same time, although the University of Michigan survey report (red) was worse than expected and sentiment collapsed (indicating a severe economic slowdown or recession), it did nothing to stop yields from rising to the day’s high.

The data do not matter because: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 downplay tariffs’ impact on markets, U.S. equities will definitely be choppy, choppy, choppy, and intraday event-driven moves should be sold into when prices rise.

Turning to the bond market means the tension will focus on the increasingly unavoidable conflict between Trump and Powell, the Fed will continue to resist calls to buy bonds. As for Powell, he actually wants to be remembered 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 recession + rate cuts are not on the Fed’s agenda

2025.04.14

How China Can Completely Emerge from Deflation: Signals of a Monetary Anchor and Asset-Price Reconstruction; A Discussion of This Cycle’s Chinese Bonds and RMB-Denominated Gold, the Real Story Behind the PBOC’s Operations, and Another Possibility for Gold’s Rise (Including a Forecast Target Price)

To state the conclusion first:China is implementing a profound shift in monetary and fiscal policy. The operating logic of this policy transition is clearly visible: it is being carried out jointly through Chinese bonds (China’s safe assets), Chinese risk assets (equities and real estate), and yuan-denominated gold, forming a post-crisis path to monetary repair.The true signal of asset price revaluation lies neither in the yuan-dollar exchange rate nor in the interest-rate path, but in gold—the yuan-denominated gold price is China’s true monetary anchor.

The starting point of this chain of events can be traced to the second half of 24. At the time, the dollar strengthened on the momentum of Trump’s campaign, and the dollar index briefly surged. China, meanwhile, faced a typical deflationary shock driven by external demand. This was compounded by broad disappointment when the market’s hopes for a “dual rocket” stimulus (monetary and fiscal policy acting together) after the “October trading” failed to materialize. The first signal was the precipitous fall in China’s 10-year government bond yield. The collapse in this line at the end of last year was quite obvious.

The backdrop to this collapse was Trump’s election. China was naturally concerned about a new round of tariff wars, but The more direct reason was that, to defend the RMB exchange rate, the PBOC slammed on the brakes as the dollar surged.

At the time, the dollar index surged toward 110, reaching a new high for that period.

This put broad pressure on non-U.S. currencies worldwide, with the yuan under the greatest strain. 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 highly leveraged structure overall, 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 extraordinarily rare in the history of China’s bond market, especially given how quickly it happened, 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 reflected investors rushing into safe assets, rather than a change in policy expectations.

After that, several important changes began to emerge 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; in particular, frequent meetings with private entrepreneurs were seen by the market 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, meaning that funds began flowing back from safe assets into risk assets. This marked the end of a complete round of trading in the bond market, and it was also the core underlying driver of the current strength in Chinese equities.

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

In other words, China is now on a path similar to “post-crisis monetary repair.” At the same time, property prices in first-tier and some core second-tier cities have begun to stop falling and stabilize, and have even started to recover. The real intent of this operation is to achieve systemic debt devaluation and asset revaluation through monetary inflation.

Another front is the gold market. The real direction the market should be watching now is not the yuan-dollar exchange rate, but the price of gold in yuan. For China to escape the logical trap of debt deflation, it needs to keep pushing the yuan-denominated gold price higher, which is precisely what the entire system has been working hard to do for some time.In other words, gold priced in yuan 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 its steady state). The only way to clear the system is to release liquidity and lower real interest rates so that asset revaluation can revive risk appetite. The anchor for this process is the price of gold in yuan.The gold bull market is, in fact, the core trade for betting on China’s emergence from deflation.

Only by releasing sufficient liquidity, monetizing it, and generating monetary inflation can the “debt/liquidity ratio” return to a normal range, and the result is a real devaluation of the debt burden. The true anchor for this “devaluation” is not the yuan-dollar exchange rate, but the yuan’s depreciation relative to “real assets”—and the most important “real asset” is gold.

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

And that is precisely what is actually happening now. Although market attention remains focused on fluctuations in the yuan-dollar exchange rate, and even the central bank appears to do the same, the real driving line behind the scenes is the revaluation path of gold priced in yuan.

There is an interesting debate here:It may seem that RMB gold prices are not led by China, but are merely the result of a triangular conversion of the dollar gold price and the exchange rate. But in fact, judging from the structural trading in the gold market since the beginning of 24, the PBOC has been gradually taking control of market pricing. The trend over the past few months has clearly been closer to a “Shanghai-led” path.

If RMB gold prices are set under Shanghai’s leadership, calculating from the depreciation at the end of 24 by 30%-40% (the debt/liquidity ratio is about 30% above its steady state), that corresponds to (807-869) (25097.7-27025.9). Assuming the RMB 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 is indeed in the lead, this rally will probably approach its end sometime this year. We may first see a corrective decline, followed by a climactic spike as the market tops, followed finally by sideways trading at high levels.

The market does not understand why gold prices are rising, but the real driver of this structural rally is the core of China’s monetary and asset restructuring strategy: the revaluation path of gold priced in yuan.

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, does not constitute investment advice, and is not a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for their decisions.