From May twenty-sixth, two thousand twenty-five to May twenty-eighth, two thousand twenty-five

I. Foundation 

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

The real issue in the Japanese government-bond market: supply and demand, not Bond Vigilantes

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

This applies more clearly to U.S. Treasuries; applying it to Japanese government bonds is somewhat excessive, and at least for now, the market is not trading on that basis.

A large share of the outstanding 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 based on a logic similar to that of Bond Vigilantes.

Another angle is more fundamental and better aligned with how the Japanese government-bond market currently works: the underlying issue is supply and demand...

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

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

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

Participants noted:“Given the severe decline in liquidity in the super-long market, the Bank of Japan should consider a range of flexible responses, including halting its reduction of bond purchases, directly increasing purchase amounts, and even merging duration buckets for maturities of 10 years and above into a single bucket (merging of the 10y+ maturity buckets into a single bucket).”

However, BOJ clearly has limited room to act on issues in the super-long market, because its overall plan to reduce JGB purchases cannot easily be changed, The deterioration in supply and demand in the super-long market stems from structurally weak investment demand, a problem that a central bank fundamentally cannot solve.

The macroeconomic issue of fiscal discipline should be addressed by the government; the supply-demand problem in super-long JGB, meanwhile, should be addressed by the Ministry of Finance by adjusting 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 updated bond-purchase plan framed 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 needlessly further undermine market sentiment.

Everyone can follow this closely when the time comes.

The main point is that the trading logic for U.S. Treasuries and Japanese government bonds is different now. The two are of course linked, but they should still be viewed 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... monetize oil and gas assets before they become stranded

The 1973 export embargo ushered in an era of energy security, With the world highly dependent on external oil supplies, the Organization of the Petroleum Exporting Countries monopolized oil prices and, whenever gunfire broke out in the Middle East, could easily impose a “geopolitical risk premium” on the market, seemingly beyond challenge.

But times have changed... by 2025, the global energy supply picture had shifted, so that oil prices(adjusted for inflation)were even below the level in 1973 10 (11.65 dollars per barrel then, 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 already 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; Russia continues to raise output. In fact, Iran’s profile now has more to do with nuclear weapons and terrorism; at 400 million barrels a day, it has no pricing power..Any interruption in oil supply can be quickly made up by other producers.

Meanwhile, at the start of 5, Trump’s visits to Saudi Arabia and the United Arab Emirates, marked the start of a new alliance:

What matters is not where the money is, but where it is going...

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

The common task facing 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 Venezuela’s path.

On his first day in office, Trump declared a national energy emergency, set up an 28-day permitting channel, repealed emissions standards for gas-fired power plants and the gas cap, lifted restrictions on ANWR, and pushed full steam ahead with oil and gas production and exports. As LNG export terminals are built and pipelines continuously deliver natural gas to power plants and AI data centers, the twin engines of electrification and gas will become an irreversible trend for decades to come.

History is repeating itself with a shift in the energy paradigm.

2025.05.27

The focus may be on fiscal policy rather than monetary policy: 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 discussed the budget-cut debates in 2 and early 3 in a series of posts on the platform...All these figures are almost negligible relative to the overall size of the fiscal accounts—

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

The result of the government’s massive liquidity injection is that liquidity is genuinely flowing into the real economy. This will in fact greatly delay the downside shock the economy may face. In fact, if the tariffs really end here, this recession may well be avoidable...

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 path.

This is a very unusual macroeconomic environment:

1）The Fed is holding steady, with the aim of restraining an overheating economy; 2) meanwhile, the bulk of the fiscal deficit is actually interest expense; 3) and this interest expense ultimately flows back to the private sector (bondholders), thereby boosting consumption and investment in turn..

The Fed is trying to “suppress” the economy with high interest rates, but those high rates are “paid back” to the market through the fiscal deficit, effectively creating a second round of stimulus...This will substantially raise the bar for a recession, as long as the deficit holds steady or continues to rise, barring an extremely severe exogenous shock, the U.S. economy will continue to post nominal growth, and asset markets will continue pricing in the possibility of reacceleration.

Chart: Previous discussion

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

Chart: Notes250428 Another macro-level combination of paths that is counterintuitive but more likely

Against the backdrop of persistent debt and deficits, the Fed has effectively been pushed to the very end of the decision-making chain—it no longer has the foresight 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 still cannot serve as a basis for action..

Focusing on nominal values will be especially important this year.

2025.05.28

Data: Falsehoods, Misjudgments, 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 story of GDP negative growth in the United States made the front pages of major media outlets. There was a lot of market discussion at the time, but we didn't discuss it. It is clearer now, so we can talk about it...

From today’s perspective, This negative growth looks more like a spurious figure; many data points are like this. Looking only at the result itself cannot provide truly meaningful insight.The negative figure was mainly driven by net exports: the surge in imports in the first quarter effectively lowered the net exports component. This is entirely explainable from a trade perspective...

The GDP behind it is not that directly connected to the real economy.. This was also mentioned in the Notes a few days ago...

Chart: Notes250514 The awakening of the silent majority and the polarization of centrist voters

Ultimately, data outcomes are the result of behavioral choices. If you do not identify what the underlying behavioral choices are and simply look at the data and draw charts, it is no different from inferring causes from effects and by using the wrong B to look for C, you will only get the wrong result (actually, the result “you wanted to get”).

Returning to GDP Following the negative figure in the first quarter, the Atlanta Fed’s GDP Now model today shows second-quarter GDP annualized growth returning to around 2.2%... It is actually obvious: reality is nowhere near this dramatic.

See through the noise to become immune to all kinds of “shocking headlines.”

2025.05.28

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 does not serve as the basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for decisions.