From April seventh, two thousand twenty-five to April ninth, two thousand twenty-five

I. Foundation

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

Global Liquidity (I): Interest Rates Are Not the Main Story; Liquidity Is Key

It’s not about interest rates. It’s about balance sheet...

With tariffs in place, everyone is turning their attention to the Federal Reserve, The market’s real focus is not a topic like “how many rate cuts,” but whether the liquidity and reserve structure of the entire system remains in an ample regime and whether it is nearing the edge of a scarce regime.

The Fed and the market commonly classify liquidity as: ample / abundant / scarce

In fact, since the pandemic, the global liquidity system has remained in a highly ample reserve regime over the past few years. Looking further back, our current starting point comes after at least a decade of ample liquidity and a compressed Debt-to-Liquidity ratio. The main reasons for this situation are:After the global financial crisis in 2008, central banks around the world injected liquidity on a massive scale to stabilize the financial system; then, during the pandemic, they implemented unprecedented monetary easing.

This round of operations created an extremely loose liquidity environment and also lowered the traditional “debt/GDP” ratio. In addition, the prolonged zero-interest-rate environment encouraged many companies and governments to “extend the duration” of short-term debt, in what is known as “debt maturity transformation.”

But by the second half of 2024, this pattern was on the verge of reversing, and systemic reserves were rapidly sliding toward a “scarce regime.”Previously, the market borrowed at extremely low interest rates and pushed out repayment schedules. But these long-dated debts are gradually coming due, and the so-called “debt maturity wall” will pose a major challenge to capital markets over the next two to three years.

—A large volume of medium- and long-term debt that had previously been “locked in” is tending to mature all at once.

By definition, this reversal in the liquidity-debt relationship is enough to end the current bull market. Although it may not yet be sufficient to directly trigger a systemic bear market, its destructive impact cannot be ignored.

Further reading: Notes 250407, Powell and Yellen’s trick: “Pump and Dump”

If you extrapolate what’s happening at the Fed, the money runs out probably this September. It’s not a question of probability; it’s a question of the path.

The essence of liquidity can be defined in one sentence: its core is the balance-sheet capacity of the financial system.

This definition is rough and broad, but it is the most fundamental starting point.

The current system needs more liquidity, and that essentially means expanding balance sheets.

This is why liquidity is crucial—we are in a “debt-driven” economic system. Debt dominates everything. Enormous amounts of outstanding debt need to be refinanced every year. Today’s capital markets are no longer centered on “raising funds for new investment projects”; they revolve entirely around “debt rollover.”

Debt rollover requires sufficient balance-sheet capacity in the system. This capacity depends on the degree of expansion of the entire financial system. But the expansion of the financial system itself is constrained or guided by the policy boundaries imposed by central banks and regulators.

If the central bank itself is shrinking its balance sheet, the financial system will find it difficult to expand in tandem. In that situation, the Fed must step back in and expand its own balance sheet.

Further reading: Notes 250402, Positioning America (V): Path Dependence—QE is not called QE, and liquidity injections are not called liquidity injections

Most large market transactions are essentially debt rollovers rather than new capital raising. If debt cannot be rolled over smoothly, the market structure will break down. When debt cannot be rolled, it is not a matter of price but of survival. So the core issue is not the level of interest rates, but whether there is room on balance sheets to absorb the debt.

If liquidity is insufficient to support the debt structure, systemic risk can be triggered even without a rate hike. The Fed’s continued QT will bring “liquidity compression,” effectively draining the financial system’s capacity to refinance.

Liquidity is currently somewhere between abundant and ample, but “very close to the edge.” If we linearly extrapolate variables such as the current pace of QT, RRP depletion, and TGA rebuild, reserves will fall below the system’s critical threshold by 9 at the latest this year, bringing us back into a period of dislocation similar to the repo crisis of 2019 9.

The repo market has already priced in this situation. In the repo market, spreads are widening continuously, and this is a very clear trend.This persistent widening of spreads has surely caught the attention of Fed policymakers. They have said they do not want a repeat of the repo-market crisis of 2019, but we are indeed moving closer to that brink, step by step.

The spread between SOFR and Fed Funds keeps widening. Spread widening is the most typical early warning signal, and this trend is almost a shadow of the period just before 2019 9. Uneven reserve distribution within the system, divergent reserve structures at large banks and regional banks, the rapid depletion of RRP balances, and the continued QT together form a typical liquidity exhaustion path.

The core of modern liquidity is not an independent, static concept, but a dynamic intersection of liquidity × collateral × balance-sheet capacity.Paying attention to liquidity means keeping a close eye on collateral, and the repo market is precisely where these two key variables—liquidity and collateral—meet, Repo rates will be a very important indicator this year.

If collateral quality deteriorates and balance-sheet capacity is constrained, the system could suddenly freeze up even if the quantity of reserves has not changed. To understand the current financial system, we cannot look only at interest rates; we must look at repo collateral structures, reserve tiers, and balance-sheet availability across the entire system..

The banking system’s balance-sheet capacity is contracting, and regulators are also tightening reserve-buffer requirements on the banking side. This kind of Structural squeeze can only be resolved through the Fed’s active balance-sheet expansion or a shadow-credit blowup; there is no neutral option in between.

Further reading: Notes250331 Positioning America (III): The Fragile Symbiosis Between Private Credit and Pensions

Further reading: Notes 250402, a non-bailout version of QE: Operation Twist 2.0

We have entered a world driven by debt refinancing, in which the balance sheet itself is the core variable. Today’s market is no longer one driven by capital expenditure, where interest rates determine investment returns—the defining variable of this era is no longer the level of interest rates, but balance-sheet capacity..

This is a paradigm shift in the macro narrative.

2025.04.07

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

The essence of “Pump and Dump” is to inject a full package of hidden stimulus into the U.S. economy through a series of actions outside the rules.Specifically, these were a series of actions taken by Powell and Yellen during 2024, intended, from one perspective, to boost Biden’s reelection campaign... Although the outcome clearly was not successful... a package of “hidden stimulus policies” was indeed injected into the U.S. economy.

This hidden stimulus package could be called “QE’s QE,” meaning a series of actions taken by the Fed outside its official QT or balance-sheet policy.

“Balance-sheet policy” mainly refers to QT as currently defined by FOMC: allowing U.S. Treasuries to mature naturally without reinvesting the proceeds, thereby shrinking the balance sheet. Conversely, if they continue buying Treasuries, that falls under QE operations.

This has in fact diverged from the original conception of QE. Returning to the Bernanke era, he emphasized that QE is transmitted fundamentally through changes in bank reserves (he stated this very clearly), whereas the Fed’s definitions of QE and QT have increasingly been stretched.

Further reading: Notes 250328, Four Different Forms of QE: Introducing the Concept of Monetary Financing

Further reading: Notes 250328, recalibrating the definitions of QE and QT

“QE that is not QE” refers to the Fed’s operations outside of Treasuries and MBS, including RRP (the reverse repo facility), the decline in RRP balances, fluctuations in the Treasury General Account (TGA), operating losses generated by Fed-held assets, and the now-discontinued BTFP (Bank Term Funding Program), among others—In essence, this is liquidity injected into the system by the Fed outside its official QT policy. In other words, they are not actually tightening; they are quietly carrying out “hidden QE.” That is where the phrase “QE that is not QE” comes from.

Under Janet Yellen’s leadership, the U.S. Treasury very cleverly chose to finance the government by issuing short-term Treasury securities (bills).Since the end of 2023, more than 60% of U.S. deficit financing has been completed through Treasury bills, an extraordinarily high proportion by modern historical standards.

Treasury bills are very short-term government securities, typically maturing within 12 months, and they pay no interest (that is, they are zero-coupon bonds). These instruments are popular with banks and credit institutions. But When these financial institutions buy large amounts of bills, they are effectively “monetizing the fiscal deficit” directly. If we consider the liquidity generated by the Treasury’s changes to its financing structure and increased short-term borrowing together with the Fed’s “Not-QE QE” operations, we can see a genuine systemic liquidity injection.

In essence, fiscal and monetary policy are jointly implementing a form of “duration management.”

This is actually another disguised way of carrying out YCC operations.At the beginning of 2024, this kind of liquidity injection peaked at about 6 trillion dollars in total, effectively giving markets and the real economy a shot in the arm. This is very tangible additional liquidity that continues to flow into the system.

Further reading: Notes 250402, the non-bailout version of QE: Operation Twist 2.0

But over the course of 2024, this liquidity stimulus can be seen to be winding down rapidly, with the remaining stimulus now below 1 trillion dollars. What truly matters is the “second derivative”—that is, the rate of marginal change. Understanding this marginal liquidity contraction is central to judging the direction of markets and the economy: marginal liquidity is highly correlated with the Philadelphia Fed Manufacturing Index for U.S. equities, with a lag of about 9 months.

The global economic slowdown resulting from this fading liquidity had already become clearly evident since mid-12 last year. This slowdown began before tariffs became the market’s focus, indicating that the global economy had already been slowing quietly and was not directly driven by the recent trade-friction issues.

A major factor behind this slowdown is the ebbing of this “implicit stimulus.” This is why evidence of an economic slowdown is now gradually emerging. Rising tariff uncertainty is only the macroeconomic spark aggravating this trend.

2025.04.07

U.S. Treasuries/Gold: A Geopolitical Relative-Value Thesis

For sovereign reserve managers, the dollar has no genuine alternative within the existing fiat currency system. Gold may be the only asset without counterparty risk, the problem is that it is difficult to transport and trade, yields no interest, and has a cost of holding (the dollar funding rate + storage costs − convenience yield). By contrast, current U.S. Treasuries can provide an interest return of 4%-5%.

Historically, whenever market concerns about U.S. fiscal overextension or geopolitical risks intensify, U.S. Treasuries tend to depreciate relative to gold.

The early 2000s are a good example of U.S. Treasuries depreciating relative to gold:

because the United States had to fight a recession and increase military spending after 9 11. Geopolitical tensions were very high during the “War on Terror.”

In 2008-2015, after the global financial crisis, U.S. Treasuries appreciated relative to gold:

The main reasons were 1) the U.S. deficit was not a major problem, because the current account and budget balances did deteriorate sharply, but this was temporary and recovered in 2013; 2) the Fed supported the value of U.S. Treasuries through QE; 3) geopolitical relations were broadly stable, and most governments were focused on addressing the effects of the global financial crisis.

The pandemic period in 2020:

The U.S. twin deficits surged, but U.S. Treasuries remained stable relative to gold because 1) the rest of the world and the United States were “in the same boat,” with a synchronized global recession, and the United States was “the cleanest shirt in the dirty laundry,” relatively the most stable region; 2) governments were busy dealing with domestic problems caused by the pandemic and their own domestic-demand challenges.

Since 2022:

Since the Russia-Ukraine war and the subsequent financial sanctions took effect, U.S. Treasuries have gradually depreciated relative to gold.

Finally, the most important chart for examining the relationship between U.S. Treasuries and gold:

White line = U.S. twin deficits (current account + budget balance, as a percentage of GDP, left axis)

Yellow line = total outstanding U.S. Treasury debt divided by the gold price

Red shaded areas = U.S. recession periods

2025.04.08

Global Liquidity (II): Collateral-Driven Liquidity System & Two Control Mechanisms

Activity in the dollar system has shifted from traditional banking to shadow banking, driven by regulatory arbitrage—a structural shift largely attributable to the regulatory metric SLR (Supplementary Leverage Ratio), which has allowed shadow banking to bypass capital constraints and expand rapidly.

Regulations have essentially made it very difficult, or even unprofitable, for banks to conduct business using their own balance sheets. As a result, a large volume of business has shifted to other nonbank credit providers or has simply been “moved off balance sheet” into off-balance-sheet activities.

This means there are two control mechanisms in the current financial system, which is key to understanding how the entire liquidity system works.

The first is the lender-of-last-resort function (lender of last resort), a core responsibility of traditional central banks, which maintain system stability by providing reserves to commercial banks. This function operates through the traditional banking channel, which has traditionally centered on “safe-asset investment” and therefore dampens volatility—in other words, it is countercyclical.

The other control mechanism revolves around the shadow banking system and represents an “emerging function”: the central bank (or the central bank together with the Treasury)seeks to act as the dealer of last resort (dealer of last resort) in this mechanism, with the core aim of stabilizing or underpinning the market value of collateral.

The importance of collateral pricing is self-evident: it directly determines the system’s capacity to generate liquidity.

And that is also where the problem with a collateral-driven liquidity system lies: the more the system shifts toward the shadow side and relies on private debt assets as collateral, the farther these assets move beyond the coverage of the “official safety net”, making the risks increasingly difficult to control. Ultimately, these mechanisms amplify deviations and reinforce procyclicality (deviation amplifying, pro-cyclical)—and this is the source of a potential crisis: what is the “integrity” of private-sector collateral? It is not fully backstopped by central banks or fiscal authorities, which is the greatest systemic vulnerability.What is the “integrity” of private-sector collateral? It is not fully backstopped by central banks or fiscal authorities, and that is the greatest systemic vulnerability.

Once the macroeconomy begins to slow, this structure can easily trigger a negative feedback loop and eventually cause a cascade-like breakdown of financial linkages (“cascade down”)—as happened in 08.

In the first series, we provided a good indicator for monitoring this risk:

The spread between the SOFR rate (the key rate in the current repo market) and the federal funds target rate.

Related reading: Notes 250407 Global Liquidity (I): Interest Rates Are Not the Main Story; Liquidity Is What Matters

This indicator also has a limitation: it is where the problem ultimately becomes visible, in other words, it is a lagging indicator, not a leading one—it is not forward-looking in itself unless its trend is tracked continuously.

Generally, the earliest signs of reserve stress tend to appear at quarter-end, because settlement and regulatory constraints tighten funding flows at quarter-end. The Fed has indeed intervened several times to address this issue, trying to ease pressure and keep funding rates within a reasonable range by increasing the capacity of the Standing Repo Facility (Standing Repo Facility, SRF).But the problem is that, so far, usage of the SRF and the discount window has been very low—the market has not truly tapped this liquidity lifeline.

Over the past six months, the SOFR rate has remained above the federal funds rate target, and has seen frequent sharp fluctuations, indicating that stress in the repo market is rising.This means the repo market is already experiencing problems. Either there is a shortage of high-quality collateral or there is a systemic liquidity shortfall.In either case, the market’s structure is beginning to break down—and the repo market is the “heartbeat” of the entire financial system, so the current situation is genuinely very dangerous.

This is also one reason the Fed has paused, or signaled that it will soon pause, QT. Although it has not completely stopped balance-sheet runoff, MBS is still shrinking passively, and Treasuries are also declining by about 50 hundred million dollars a month. But liquidity pressure has become a policy priority.

The market is now in a “tool-exhaustion” phase. The various levers the Fed has frequently pulled over the past four years—such as RRP—are now almost exhausted, with balances close to zero. Only temporary quarter-end funding operations remain, and TGA cannot take over on a sustained basis, In other words, nearly all the major liquidity levers have been pulled to their limits—a very clear consequence is now emerging: the system needs new intervention tools.

2025.04.09

II. Insights

Our Viewpoints and ideas on market.

If Recession Returns: A Simple Framework for Analyzing Gold and U.S. Treasuries

If the next U.S. recession arrives, whenever that may be, the twin deficits will most likely surge again. The key question is whether U.S. Treasuries will then depreciate against gold.

A simple core framework for judgment based on multiple factors, To emphasize again, we are discussing a relative-value trade here, not absolute performance：

Related reading: Notes 250408 U.S. Treasuries/Gold: A Geopolitical Relative-Value Thesis

1. A U.S.-only recession?

If the next possible recession affects the United States more than other countries, concerns about fiscal overextension may cause the market to push U.S. Treasuries lower relative to gold. If the global economy is “in the same boat,” then UST may retain its value against gold, as it did after the global financial crisis and Covid.

However, China’s economy and markets are currently at a markedly different point in the cycle from those of the United States, so the impact of a future U.S. recession on China may not be as significant as it was in the past.

The likelihood of being “in the same boat” is falling sharply. From this perspective, U.S. Treasuries would depreciate relative to gold.

2. Is the geopolitical situation stable or turbulent?

If the ongoing Middle East conflicts escalate further, the Russia-Ukraine war and geopolitical issues elsewhere continue to spread, or U.S.-China relations deteriorate (a deterioration that may first show up in tariff disputes), other central banks may continue diversifying from UST into gold, although diversification itself is already a major trend; geopolitics mainly affects its pace and creates short- to medium-term trading shocks (7-14 weeks).

3. Who will buy large quantities of UST during the next recession and absorb the next wave of Treasury issuance?

As foreign holdings shrink, U.S. domestic entities (the Fed, banks, mutual funds, banks, pension funds, and households) have already been increasing their share of UST ownership, For more on this shift in holders toward domestic entities, see the piece on the Mar-a-Lago Accord.

Related reading: Notes 250325 The Stillborn Mar-a-Lago Accord

4. Is the petrodollar system stable? This is the question about the Petrodollar.

The widespread use of the dollar in global oil and gas trade sustains natural demand for U.S. Treasuries. Major Middle Eastern oil producers indirectly turn oil revenues into additional demand for Treasuries through exchange-rate regimes pegged to the dollar. If the “petrodollar” mechanism is disrupted, demand for Treasuries may be affected again.

The dollar’s dominant use in global oil and commodity trade increases demand for UST.Major Middle Eastern oil producers maintain currency regimes pegged to the dollar. By tying their exchange rates to the dollar, they indirectly convert oil revenues into additional demand for U.S. Treasuries, meaning oil revenue surpluses indirectly boost demand for UST.If the “petrodollar” mechanism is disrupted, demand for U.S. Treasuries may be affected again.

A good way to observe this is to watch for alignment between oil-producing countries’ policy moves and those of the U.S. governing party. Oil producers often make statements or suddenly raise or cut production at certain key moments.

2025.04.08

III. Market Pulse

Our latest Comments on the economic and market environment

The depreciation in this round of CNY + why we are continuing to hold the two trades discussed earlier

USD/CNY broke through the 7.3 threshold, signaling further room for the renminbi to depreciate. Strategically, continue shorting high-beta currencies and going long the Swiss franc and yen. There has been extensive discussion of this on the community platform, so we will not list it all here, We explained the rationale for these two trades 1-2 months ago. They are now in the profit-taking phase, so there is no rush to close them.

It is worth noting that, The depreciation of CNY against USD in this round differs from what happened during the 2018 trade-war period:

Although the dollar has continued to weaken against most major currencies and gold since 2025, the renminbi has continued to depreciate. 7.3, a key resistance level that had acted as support several times over the past few years, has now been broken—an event of considerable significance.

In 18, the renminbi’s weakness coincided with broad dollar strength. This time, however, it is not driven by a stronger dollar or a widening U.S.-China interest-rate differential; it is more structural in nature, reflecting increased economic vulnerability and a renewed escalation in external trade pressures. After China retaliated against the “Liberation Day tariffs,” the U.S. government announced an additional 50% tariff on imports from China, reigniting trade tensions.

Domestically, the current situation is mired in deflationary pressure, It is inevitable that policy will step up stimulus, and although the authorities continue to stress the importance of exchange-rate stability, at present, indeed It is highly likely that they will continue to tolerate further depreciation in CNY, from 5% to 7%, to partially offset the impact on exports to the United States.

If things continue to unfold as we expect, weakness in CNY will continue to pressure high-beta developed- and emerging-market currencies, while further boosting the performance of safe-haven currencies such as the Swiss franc and yen, This is why, as mentioned at the beginning, there is no rush to close these profitable trades，The first round of these trades was based on U.S. fundamentals. This is now the second trading cycle, focused on our side’s policy. When the policy measures are exhausted, it will be time to take profits and close the positions.