From the fourteenth of April, twenty twenty-five to the fifteenth of April, twenty twenty-five

I. Foundation 

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

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

More is happening. To pick up where we left off, the term premium across the entire system is slowly 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 in FT’s corporate bond section. What we mentioned in Notes 250327, “Identifying the Precursors of Systemic Risk in the United States (Two),” is now intensifying..We have been focused on corporate credit for the past few years, and the market is finally beginning to show the long-awaited price discovery signals..

Figure: Notes 250327, Identifying the Precursors of Systemic Risk in the United States (Two)precursors

We anticipated the trend once again, and the reason is simple: if everything were “normal,” there would be no outliers, In other words, when an outlier appears within a system, it is bound to expand and persist..

The performance of corporate bonds shows that the market is indeed deteriorating rapidly, particularly at the tail end of the credit chain. This actually points to the two-dimensional liquidity structure we have been following:A two-dimensional liquidity structure: first, the supply of liquidity itself (flow); second, how liquidity is deployed into risky 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, the total amount of systemic liquidity has not declined noticeably, but its marginal momentum is weakening substantially. Within that, the efficiency with which liquidity is allocated to risky assets—that is, the latter dimension—is deteriorating faster.

This is actually a question of the global risk cycle, a medium- to long-term cycle of about 9-10 years—the proportion of risky and safe assets that global capital allocates in portfolios. At present, U.S. investors’ risk appetite has deteriorated very noticeably, far more than the global trend overall.You can pull the data yourselves and compare how this safe-asset ratio has changed for U.S. capital and 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. That explanation is valid to some extent, but the lack of alignment between global investors and U.S. investors reflects an issue on another level. As we have repeatedly emphasized, alignment is very important to us; it is a fundamental principle in our overall macro assessment.

If it were “only” a tariff issue, global investors should be deteriorating in sync with U.S. investors in their behavior. The fundamental reason for the current lack of alignment is still that the U.S. economy is genuinely deteriorating and slowing down.

This ultimately brings us back to the structural issue mentioned in the liquidity-series Notes: the United States’ hidden stimulus is weakening.

Figure: Notes 250407, Powell and Yellen’s “Pump and Dump” tactics

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:Data representing 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 yield on 2-year and 10-year Treasuries.

Once yield-curve convexity starts to surge, it is often an early warning signal of a weakening economy and a deteriorating credit market.

That is exactly what we are seeing now: convexity has risen suddenly, credit spreads have widened, and the credit market is beginning to deteriorate materially.Yields on corporate bonds have even fallen below the MBS rate backed by the government. This is highly unusual. Even looking back to 1979, we have not seen this kind of pricing inversion., if U.S. economic growth falls from 7% to 3-4%, the credit market will have difficulty absorbing this repricing.

More importantly, 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 essentially the market’s pricing of the probability of default at any given time.

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

2025.04.15

II. Insights 

Our Viewpoints and ideas on market.

India: A Relatively Safe Haven

During a week when global equity markets fluctuated amid heightened tariff uncertainty, the NIFTY index was broadly unchanged week over week. Our trial position in India is still showing an unrealized gain, so there is no need to panic. Our core position would not have a stop-loss in the first place; the “don’t panic” message is for everyone in the community. Whatever the view, having an unrealized gain helps many people hold on to a position.

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

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

For related reading, see Notes 250313, “India Trade Can Look”

The Reserve Bank of India cut its policy repo rate by 25 basis points to 6%, and also shifted 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, meaning the easing cycle may be deeper and faster than the market expects.

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

If the indices cannot move higher going forward, 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 Extreme, Alignment, and the U.S. March Inflation Report

Risk indicators have deteriorated significantly; everyone knows that what matters in the actual market is the issue of extremes. The various indicators show roughly similar results, so here we use GS as a proxy. Goldman Sachs’ proprietary risk-appetite indicator has fallen sharply, but it has not reached an extreme level. Hoping for the so-called There may be no such thing as a decline that reaches the bottom all at once; that is actually worse, as it means a longer period of range-bound movement lower.

Figure: Risk indicators have not reached extreme levels 

Figure: Market stress in the microstructure has also not reached an extreme level

Figure: The consumer confidence index is now the basis on which some people are buying the dip

The latest confidence index made the FT front page and is now the basis for many people buying the dip. According to xx statistics, the current probability of buying the dip has a reasonable risk-reward profile over a 6--12-month time horizon (roughly the same across the board). The risk of expressing this view is small, because it will take until a year from now to verify it, For us, at least for now, an extreme without confirmation from alignment is not actionable.

Figure: Views on inflation by political party

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

The views of the different parties on inflation are now moving in the same direction, and the Republican view is also shifting. This means Certainty in the U.S. session is not in equities, but in bonds.

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

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

Figure: More details

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

The reason the data do not matter is:The March inflation report was the last data release before tariffs.

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 will play down the impact of tariffs on markets, U.S. stocks will certainly fluctuate, fluctuate, fluctuate; sell into strength when intraday events cause shocks.

Turning to the bond market means the conflict will focus on the increasingly unavoidable clash between Trump and Powell, the Fed will continue to resist calls to buy bonds, while Powell himself wants to be remembered in the history of monetary policy—and to be 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

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

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

2025.04.14

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 their decisions.