April fourteenth, two thousand twenty-five to April seventeenth, two thousand 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 Convexity

More is happening. Picking up where we left off, the term premium across the system is slowly climbing, The next key question is: how will the credit market 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 Notes250327, “Locating America (II): Harbingers of Systemic Risk,” is currently intensifying.. We have been following corporate credit for the past few years, and the long-awaited price discovery signals are finally beginning to appear..

Chart: Notes250327Identifying the Warning Signs of Systemic Risk in the United States (Two)

Once again, we anticipated the trend ahead of time, and the reason is simple: if everything were “normal,” no outliers would appear, In other words, when an outlier appears within a system, it is necessarily tending to expand and persist..

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

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

This is actually a matter of the global risk cycle, which is roughly a 9-10-year medium-to-long-term cycle—the way global capital allocates the proportions of risk assets and safe assets in portfolios. At present, the risk appetite of U.S. investors has deteriorated very markedly, far more than the global trend as a whole.You can pull the data yourselves and compare how the safe-asset share has changed for U.S. capital and global investors; the result is very interesting.

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

The mainstream explanation is uncertainty over tariff policy. That explanation is indeed valid to some extent, but the lack of alignment between global investors and U.S. investors reflects a problem at another level. We keep emphasizing that 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 contracting.

Ultimately, this still comes back to the structural issue discussed in the liquidity series of Notes: the weakening of the United States’ implicit stimulus.

Chart: Notes250407Powell 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, the higher the market’s expected credit or default risk.

There is another internal indicator frequently used on Wall Street:A measure of the convexity of the U.S. Treasury yield curve, also called the butterfly spread, which measures how far the yield on 5-year Treasuries deviates from the average of the yields on 2-year and 10-year Treasuries.

When yield-curve convexity starts to surge, it is often an early warning signal of economic weakness and deterioration in credit markets.

This is exactly what we are seeing now: convexity has suddenly risen, credit spreads have widened, and the credit market is beginning to deteriorate in a material way.Corporate bond yields have even breached the government-backed MBS rate, which is highly unusual. 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.

More importantly, as we have said before, the credit market itself underpins the financial system’s collateral base and supports the entire Collateral System....

And credit spreads are, in effect, the market’s pricing of default probabilities 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 generally low credit spreads and yields: collateral base, shortage of credit asset supply, and the Fed’s decision-making system

The financial market’s Collateral System is directly tied to the Fed’s decision-making system. It could even be said that the Fed’s decision-making system itself has helped structurally suppress spreads for a long time in the past, the Fed’s direct intervention to buy CP in 20 shocked many people, also It was precisely after that that the credit market began to embed a new consensus:If things get bad enough... the Fed will buy it...This is precisely the root cause of the long-term compression of credit spreads.

Apart from this fundamental consensus issue, there is another important reason behind the structural factors keeping credit spreads and yields generally low—Many companies extended the duration of their debt (termed it out) during the pandemic, and afterward there were too few credit assets available for new purchases in the market, while new bond issuance was also very low.

A long-term comparison of the U.S. ISM manufacturing index (PMI) with credit spreads shows that their movements broadly tracked one another over the past several decades, until this relationship began to decouple in the past five years.Over these five years, PMI has remained weak, while credit spreads have continued to compress. This makes no logical sense; there is a pricing distortion.

This also shows that an “abnormal structure” has emerged in the system, with a supply-demand imbalance, especially a scarcity of credit assets.

2025.04.16

An Introductory Guide to the Basis Trade

Last week, Planet published an article titled Notes250410Basis Fluctuations Are More a Symptom Than a Root Cause (Truly Understanding Basis Trades)The article (those who haven’t read it must do so) drew a lot of interest from readers in the details of the 20 event. Here we’ll provide some background again and break down the concepts in the previous article in a way that is easier to understand.

To understand “what a basis trade is and why it has become so popular,” we need to extend the timeline further back, from the market turmoil of 2020 to the regulatory reforms after the financial crisis of 2008.

After the painful near-collapse of the financial system, regulators set about making the banking system safer.They required banks to hold more capital to absorb potential losses, while substantially increasing their holdings of “high-quality liquid assets”—assets that can be sold quickly for cash in an emergency. U.S. Treasuries (US Treasuries) are one of the central asset classes in this category.

The positive side of these reforms is that the banking system has indeed become more resilient; but they also brought negative effects—the balance-sheet capacity of banks was squeezed, market liquidity declined, and banks became less willing to take on risk.ing balance-sheet capacity was squeezed, market liquidity declined, and banks became less willing to bear risk.This means, It has become more difficult and costly for large institutional investors (that is, bank clients) to obtain financing from broker-dealers.

Without leverage, clients’ ability to enhance returns is 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 more business volume and commission revenue decline.

But Wall Street has always excelled at working against policy, and it quickly found an alternative—the basis trade was born.

This trading structure allows investors, especially hedge funds and active managers, to achieve two key things at once: its core logic is to go long cash Treasuries and short Treasury futures (that is, hedge the price difference).Investors finance their purchases of cash Treasuries through the repo market—this market is the core channel through which institutions obtain short-term wholesale funding and liquidity, while simultaneously 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 among the safest assets, financing rates are usually low, providing the strategy with positive carry.

The moment of collapse:

By 2020 3, when the market as a whole collapsed, the basis trade went from being a solution to becoming 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 suddenly—even though banks could earn some return from it, survival came first.

As a result, Banks withdrew across the board almost simultaneously, directly putting hedge funds engaged in basis trades in a difficult position. They could, of course, choose to hold to maturity to spread out the losses, but 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 the banks themselves were unwilling to take them on at that point, and market liquidity fell into a “vacuum.” The yield on 10-year Treasuries then surged, and the Treasury market rapidly plunged.

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

This is also what we discussed in Notes250416Continuing the Structural Reasons Behind Generally Low Credit Spreads and Yields: Collateral Base, Shortage of Credit Asset Supply, and the Fed’s Decision-Making System the operation mentioned in which the Fed entered the market to buy CP...

Only after the Fed stepped in did the turmoil come to an end.

2025.04.17

II. Insights 

Our Viewpoints and ideas on market.

India: A Relatively Safe Haven

During a week in which global equity markets were volatile amid heightened tariff uncertainty, the NIFTY index was essentially flat week over week. Our starter position in India remains in profit, 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 group. Regardless of one’s view, being in profit is what allows 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 phones are produced in India, including 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 related reading, see Notes250313India trades can look

The Reserve Bank of India cut the policy repo rate by 25 basis points to 6%, while also shifting its policy stance from neutral to accommodative. Monetary policy has clearly turned dovish, There is likely to be at least 50 basis points of room for easing over the rest of this year, which means 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 closely watch several major sectors, including autos, banks, fast-moving consumer goods, and information technology.

If the index cannot move higher later on, 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 Extremes, 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 much the same, so we use GS here as a proxy. Goldman’s proprietary risk-appetite indicator has fallen sharply but has not reached an extreme level; hopes for the so-called The possibility of a one-step decline straight to the bottom may not exist; in fact, this is worse, because it means a longer period of range-bound consolidation and decline. 

Chart: Risk indicators have not reached extreme levels 

Chart: Market pressure in market microstructure is also not at an extreme

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

The latest confidence index made the FT front page and is now the basis for many people buying the dip—as xx statistics show, at present, buying the dip offers a reasonable risk-reward profile over a 6-12-month time horizon (it is more or less always like this). The risk of expressing this view is small, because it will take a year to verify it, For us, at least from where things stand now, extreme readings without confirmation across the board are not actionable.

Chart: Views on inflation by political party

The consensus view is not in the U.S. stock market, but elsewhere.

Views on inflation across the parties are now moving in the same direction, and the Republican view is also shifting, which means The direction is clearer in the U.S. session in bonds than in stocks. 

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 biggest one-week gain in market performance since 1987 (38 years ago).

Chart: More detail

Looking at the intraday chart in detail, the better-than-expected CPI and PPI reports (green) had no effect on the U.S. ten-year yield. Meanwhile, although the University of Michigan survey (red) was worse than expected and sentiment collapsed (severe economic slowdown or recession), nothing prevented yields from rising to the day's high.

The reason the data do not matter is:The March inflation report was the last pre-tariff data point.

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 keep moving sideways, sideways, sideways; sell intraday event-driven spikes.

The shift toward the bond market means the point of tension will center on the increasingly unavoidable conflict between Trump and Powell The Fed will continue to resist calls to buy bonds, and Powell, for his part, actually wants to go down in monetary policy history; 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 May rate cut closed at 24% last Friday

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

2025.04.14

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

To state the conclusion first:China is carrying out a profound shift in monetary and fiscal policy. The main lines of this policy transition are clearly visible: it is being accomplished jointly through Chinese bonds (China’s safe assets), Chinese risk assets (stocks and property), and RMB-denominated gold, forming a path to monetary repair in the post-crisis era.The true signal of an asset-price revaluation lies neither in the RMB-to-U.S.-dollar exchange rate nor in the interest-rate path, but in gold—RMB-denominated gold prices are China’s true monetary anchor.

The starting point of this trail of clues can be traced back to the second half of 24. At the time, the dollar strengthened on the momentum of Trump’s campaign, and the U.S. Dollar Index spiked in the short term. China, meanwhile, faced a typical deflationary shock driven by external demand. This, combined with the market’s disappointment after the “October trade” failed to deliver the expected “dual rocket” stimulus (monetary and fiscal policy working in tandem), sparked widespread disillusionment. The first signal came from the precipitous plunge in China’s 10-year government bond yield. The line’s collapse at the end of last year was very clear.

The backdrop to this plunge was Trump’s election; China was naturally concerned about a new tariff war, 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 U.S. Dollar Index surged toward 110, reaching a new interim high.

This put broad pressure on non-U.S. currencies worldwide, with the renminbi under the greatest pressure. The authorities therefore adopted an extremely forceful monetary tightening to stabilize the exchange rate. As a result, the economy at one point entered a tailspin of decline, once again showing signs of debt deflation. Against this backdrop, given the overall highly leveraged structure, investors began shifting wholesale into safe assets (such as government bonds) and away from all risk assets.

The plunge in the yield on 10-year government bonds was extremely rare in the history of Chinese bonds, especially given that it happened in a very short period, Clearly, this was not a natural adjustment in the market’s rate expectations, but a collapse in the term premium caused by systemic panic. In other words, most of the yield change came from investors rushing into safe assets, not from a change in policy expectations.

After that, several important changes began to emerge one by one.

First came a pullback in the dollar, which gave China some room to ease policy. Senior officials then quickly signaled a “pro-capital” stance, especially through frequent meetings with private-sector entrepreneurs, which the market viewed as a clear policy turning point. Over the following weeks, yields in the Chinese bond market rebounded rapidly, Corresponding to the earlier plunge, this was a recovery in the term premium, meaning funds began flowing back from safe assets into risk assets. This brought a complete round of bond-market contestation to an end, and it was also the core underlying force behind the strength of Chinese equities in this cycle.

Beyond the shift in the policy stance, the central bank is also acting at full speed. The PBOC’s net liquidity injections into the system If annualized, That is roughly 20 trillion yuan, or about 2.75 trillion U.S. dollars in total net stimulus, calculated at today’s exchange rate of 7.3. This is a very large amount of monetary injection, comparable in scale to the first round of QE after the U.S. financial crisis of 2008.

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

Another front is the gold market. The real direction the market should focus on now is not the RMB-to-U.S.-dollar exchange rate, but the price of gold denominated in RMB. For China to escape the logical trap of debt deflation, it needs to keep pushing up the RMB-denominated gold price, and that is exactly what the entire system has been working hard to do over the past period.In other words, RMB-denominated gold 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 level). The only way to clear it is to release liquidity and lower real interest rates, allowing asset revaluation to revive risk appetite; the anchor for this process is the RMB-denominated gold price.The gold bull market is, in fact, the core trade for betting on China emerging from deflation.

Only by releasing sufficient liquidity, carrying out monetization, 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 of this “devaluation” is not the RMB-to-U.S.-dollar exchange rate, but the depreciation of the RMB relative to “real assets”—and the most important “real asset” is gold.

In other words, the rise in RMB-denominated gold is evidence that China is systematically emerging from a debt-deflation structure.

And this is exactly what is happening now. Although market attention is still focused on fluctuations in the RMB-to-U.S.-dollar exchange rate—and even the central bank appears to be focused on it—the real story unfolding behind the scenes is the path of revaluation in RMB-denominated gold prices.

There is an interesting point of contention here:It may seem that the RMB-denominated gold price is not driven by China and is merely the result of a triangulated conversion of the U.S.-dollar gold price plus the exchange rate. But looking at structural trading in the gold market since the start of 24, the PBOC has in fact been gradually taking control of market pricing. The trend over the past few months has clearly been closer to a “Shanghai-led” path.

If the renminbi gold price is set under Shanghai’s leadership, then calculating the depreciation since the end of 24 as 30%-40% (with the debt/liquidity ratio about 30% above its steady state) would correspond to (807-869) (25097.7-27025.9). Assuming the renminbi 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 leading the process, this rally will probably be nearing its end within this year. We may first see a corrective decline, followed by a climactic spike in a topping pattern, and finally high-level fluctuations.

The market does not understand why gold prices are rising, but what is really driving this structural rally is the core of China’s monetary and asset-restructuring strategy—the path of revaluation in RMB-denominated gold prices.

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 decision-making.