January thirteenth to January seventeenth, two thousand twenty-five

I. Foundation 

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

Interest Rates and Tech Stocks

Rising interest rates reflect expectations of strong economic growth, but they also weaken the potential for sustained economic growth in the future. This was also discussed in last week’s WeeklyWrap, A sharp rise in yields undermines the very economic strength that caused them to rise in the first place.

In a low-interest-rate environment or an expected rate-cutting cycle, markets tend to overlook valuation concerns and focus more on growth opportunities, However, when rates are pushed up early by rate-cut expectations, or even when the Fed no longer cuts rates, valuation concerns will receive significantly more attention and importance at investment committee meetings。

The MSCI Asian technology index currently has a NTM P/E ratio of 17.3 times, above its 20-year average of 15 times. The market is facing pressure from a reversion in valuation multiples toward the mean. If valuations return to their historical average, the drivers of market gains will weaken significantly, especially given that most of the growth momentum from artificial intelligence has already been priced in, This is also why, after TSM reported earnings a few days ago, the market largely traded only the downstream beneficiaries, without a broad boost to sentiment.

Relatively speaking, the sound balance sheets of high-quality companies make them less sensitive to valuation multiples and interest-rate fluctuations, so late-cycle trades should mostly focus on quality.

The “crowded trade” in tech stocks that has persisted for some time may take time to unwind. Cyclical and value stocks may outperform the market in the short term while investors wait for that process to run its course.

 Chart: Waiting for a channel breakout; a breakout of NDX100 through 21500 is key to the upside

2025.01.17

II. Insights 

Our Viewpoints and ideas on market.

America First & how people perceive the news behind data and expectations 

Trump’s America First policy clearly implies less interest in “endless wars”,This is another reason why, as we have said, inflation trades may not be enjoyable.

On the Russia-Ukraine issue, Trump appointed retired U.S. Army General Keith Kellogg as special envoy, and engaged with Zelenskyy and Putin. Ukraine is seeking international security guarantees through a ceasefire agreement, while also noting that neutrality could serve as a basis for negotiations, which would mean giving up the possibility of joining NATO.

Russia, in turn, stressed that the 2022 Istanbul Agreement must serve as the basis for negotiations, including Ukraine’s recognition of Crimea as Russian territory and the independent status of Luhansk and Donetsk. The establishment of humanitarian corridors and a mechanism for monitoring negotiations have also become key discussion points. Russia’s resilience to sanctions and Europe’s ability to maintain its defense commitments to NATO under current economic pressures will directly affect the future course of negotiations.

Polls show that the U.S. public is optimistic about the economic outlook, while pessimism about foreign affairs continues to rise. The latest Gallup poll indicates that more than 2/3 of respondents expect the stock market to rise over the next year, and more than 50% are optimistic about improvements in employment and inflation. However, 66% are pessimistic about whether international disputes can be resolved peacefully.Partisan divisions remain pronounced: among Republican voters, 76% believe that U.S. influence around the world will increase, while Democratic voters take a more cautious view.

This partisan divergence in views naturally leads to divergent views of the market:

Source: University of Michigan's monthly consumer survey

Republicans have no inflation expectations because the person who “can solve every problem” was elected, while Democrats are the opposite, Behind the data and expectations is how people perceive the news.

2025.01.13

A shift in the balance of risks: What could stop the decline in Treasuries

If the 12 meeting in FOMC marked an important shift in the Fed’s risk balancing back toward inflation, then the 12 employment report delivered the crucial next leg of that narrative, Moderate average hourly earnings data avoided a more alarming signal of a resurgence in inflation, but the case for rate cuts to ease labor-market risks has now faded from view.

On what could stop Treasury prices from falling, External news is a potential catalyst, but so far, the data continue to reinforce the assessment of the U.S. economy’s resilience amid high interest rates;Another mechanism that could drive a reversal in yields is if the rate selloff itself begins to create enough of a headwind for growth expectations(or a more pronounced rise in yields causing negative feedback for risk assets).

In fact, the significant widening of front-end spreads early last week was driven by news that Michael Barr, the Fed’s vice chair for supervision, was planning to step down from his supervisory role (Michael Barr) plans to step down from his supervisory role.Do you remember us mentioning this name in Notes241112..

That is also the point of reading Notes,“News” in the market is merely the expected outcome of probabilistic events for us.

For Michael, the market expects banking regulation to ease, which could ultimately support banks’ demand for Treasuries. However, broadly speaking, financing conditions across maturities have already eased significantly over the past two weeks.

Although the knee-jerk shift in the inflation curve after the election seems attributable to a rise in the tail risk of higher tariffs, the subsequent steepening of the curve is more consistent with the market placing greater weight on the prospect of growth driven by larger-scale fiscal stimulus.Current market positioning has left inflation pricing somewhat vulnerable to a renewed emergence of tariff concerns. If growth issues arising from tariffs return to the focus, the inflation curve could face renewed flattening pressure.

2025.01.14

The Treasury market’s plot twist: neither inflation nor debt

To reiterate, at least for now, The rise in the U.S. ten-year yield is mainly reflected in higher real yields and term premium, rather than higher inflation expectations.At the same time, the dollar is appreciating sharply as yields rise, which also does not fit the debt sustainability narrative, The divergence between the two narratives points to one conclusion：The current Treasury trade really has nothing to do with inflation or debt.

In this Notes250114 piece, “From Monetarism to Fiscal Dominance,” we discussed:“Over the past decade or more, the Fed and other major central banks played the role of ‘the last resort’ through large-scale asset purchases (such as quantitative easing, QE), providing sustained demand for the bond market. This demand effectively lowered long-term bond yields while suppressing the term premium.”

As central banks shrink their balance sheets (QT) or stop buying bonds, the market loses this “backstop demand,”More bond supply must be absorbed by the market, which in itself increases the required return on long-term bonds. And rising term premiums will offset the positive effect of the Fed’s expected rate-cut path on bonds.”

In fact, looking further, changes in overseas central banks’ official dollar reserves closely align with the reversal in the ten-year yield, The rise in the U.S. ten-year real yield + term premium of 70 basis points aligns precisely with a decline of more than 1000 billion dollars in dollar reserve assets held by foreign central banks:

Chart: U.S. ten-year Treasury real yield and term premium, and foreign official dollar reserves

The right side of the chart above shows foreign official dollar reserves held in custody at the Fed, including U.S. Treasuries held by foreign official institutions and reverse repos through the foreign repo pool, which together make up dollar reserve assets. While this does not fully prove causality, it at least indicates that sales of dollar reserves may be exerting strong upward pressure on long-term rates.

Chart: U.S. Treasuries held by foreign central banks and their reverse repo positions at the New York Fed

Since 9 18, the initial decline in dollar reserves was driven mainly by a reduction in the foreign repo pool (right chart). However, after the presidential election on 11 6, foreign official institutions shifted to accelerating their sales of U.S. Treasuries (left chart).

Since 11 6, foreign official institutions have sold about 780 billion dollars in U.S. Treasuries, bringing their total holdings below 2.87 trillion dollars as of 1 8, according to New York Fed data, These sales brought total U.S. Treasury holdings by foreign official institutions to their lowest level since the U.S. Treasury market froze in 2020 3.

Notably, the proceeds from U.S. Treasury sales do not appear to have been reallocated to the foreign repo pool, nor vice versa. This suggests that Foreign official institutions are materially reducing their allocations to dollar-denominated assets.

If foreign official institutions are selling dollar reserves on a large scale, that naturally raises two questions. First, Which counterparties are taking up these dollar assets? Second, where are foreign official institutions reallocating their funds？

U.S. domestic dealer banks are the main counterparties to foreign official sales of U.S. Treasuries, absorbing the additional supply that other investors did not buy. Dealers’ net Treasury positions have reached a record high, They have increased by more than 700 billion dollars since the election on 11 6, almost matching the 780 billion dollars in U.S. Treasuries sold by foreign official institutions over the same period.

Dealers’ overstretched positions indicate that other structural investor groups in U.S. Treasuries—especially domestic and foreign private investors—have not stepped in actively.In addition, the Fed is still reducing its holdings of U.S. Treasuries on its balance sheet. Foreign official selling, combined with weak demand for U.S. Treasuries from other investors and limited dealer absorption capacity, helps explain why the real yield and term premium on 10-year U.S. Treasuries have risen so sharply; at a minimum, this has significantly intensified market volatility.

Chart: U.S. Treasuries held by the Fed and dealer banks

Finally, if non-U.S. institutions around the world are reducing their dollar reserve holdings, where has this Where has the huge amount of money gone?

Outside the United States, falling bond prices and depreciating currencies in the U.K., Canada, and Japan suggest that these institutions are unlikely to have shifted from dollar assets to other fiat-currency reserve assets, as the chart below clearly shows, They may be reallocating funds to gold as a reserve asset.

Chart: Gold’s performance during U.S. and non-U.S. trading hours

Interestingly, although Gold appears to be trading in a range based on its overall price action, but if we separate trading hours into non-U.S. and U.S. sessions, we can clearly see some interesting things happening in the market structure.

2025.01.16

III. Market Pulse 

Our latest Comments on the economic and market environment

From Monetarism to Fiscal Dominance

The real yield on 30-year U.S. Treasuries has risen to its highest level since 2008, The recent rise in benchmark yields is somewhat independent of long-term inflation expectations and reflects more the market’s concerns about increased debt supply and larger fiscal deficits.

Over the next two years, 14.6 trillion dollars of debt will mature, while the Fed is still QT. When the biggest player in the largest bond market—the Fed—is absent, yields naturally rise. The Fed’s balance sheet has shrunk from 9 trillion dollars to 6.85 trillion dollars, It is rare for the supply-and-demand picture to be this clear.

In this term premium cycle, Fidelity’s Jurrien Timmer is a real standout:

“With the Fed and other central banks no longer the buyer of first and last resort, it seems plausible that the term premium might rise in the months and years ahead.”

Over the past decade or more, the Fed and other major central banks played the role of “the last resort” through large-scale asset purchases (such as quantitative easing, QE), providing sustained demand for the bond market. This demand effectively lowered long-term bond yields while suppressing the term premium.

As central banks shrink their balance sheets (QT) or stop buying bonds, the market loses this “backstop demand,”More bond supply must be absorbed by the market, which in itself increases the required return on long-term bonds. And rising term premiums will offset the positive effect of the Fed’s expected rate-cut path on bonds.

A rise in the term premium means higher real yields; when stocks and bonds are positively correlated, rising rates also cause volatility in the stock market, Rate panic does not necessarily mean the bull market in stocks will end, but it will certainly weaken bullish momentum.Rate cuts dominated the movement in bond yields during the previous cycle, but going forward, the term premium may outweigh the Fed’s rate-hiking/cutting cycle.

So how far can the trade go?

In 24 12, Yellen wrote in a letter to congressional leaders: "Treasury currently expects to reach the new limit between January 14 and January 23, at which time it will be necessary for Treasury to start taking extraordinary measures”, Treasury currently expects will take place between 25 1 and 14 and 1 23 reach the new debt limit, at which point the Treasury will need to begin taking extraordinary measures.

These “extraordinary measures” will directly affect subsequent market movements and are the key development we are watching now.

2025.01.14

Extreme market pricing and Inauguration Day behavior

Bond markets are currently pricing in just one Fed rate cut in 2025, of about 28 basis points, while some investors in the U.S. equity market are currently are pricing in 0 cuts, meaning no rate cuts at all, and the market also expects rates to gradually rise in 2026, through 2026 12.

Chart: Market consensus pricing

Chart: Market-implied probability of a rate hike (next 12 m)

Trump has previously made clear that he favors a weaker dollar, It is reasonable to expect that the recent “front-running” in the dollar and Treasury yields ahead of Inauguration Day will certainly reduce the likelihood of his immediately taking sharply inflationary actions, such as imposing sweeping 10% tariffs.

In fact, the extent to which tariffs on China are priced in is now worth questioning, since China has shown a relatively strong willingness to cooperate overall, and relations between China and the U.S. are currently delicate. Given current market pricing, Even if tariffs on China/Mexico/Canada are imposed as expected, they will most likely become a “sell the news” event.

If sweeping 10% tariffs are not imposed all at once, the inflation outlook is actually quite acceptable—or, one could say, it has been fully absorbed into market pricing so far:

If Trump does not mention unexpectedly high tariffs, war, or territorial annexation within 2 -3 weeks after taking office, Treasury yields and the dollar will most likely lose momentum, which would benefit emerging-market equities that have been under sustained pressure.

2025.01.15

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 decisions.