Minsheng Securities: US experiences a stock-bond-currency triple play, liquidity crisis arrives as scheduled.

When the market is focused on how changes in Trump's policy expectations will impact the economy and markets (Trump's attitude often changes within the day), we choose to avoid this low-probability speculation and analyze the potential risks that the peak of U.S. low-interest debt maturities may bring in the report. We reached a higher-confidence conclusion that without liquidity support and the "ONRRP cushion," when the debt ceiling encounters the peak of corporate debt maturities, U.S. liquidity, fundamentals, and even U.S. stocks may face another test in the second quarter. From Thursday to Friday this week, rare occurrences of stock bond and currency three-killings appeared in the U.S. market. In addition to risk aversion driving the decline in U.S. stocks, "there is also uncertainty in the outlook for U.S. bonds. If the U.S. dollar index continues to fall, U.S. bonds may not be completely safe," the logic has been confirmed as expected. In addition to the simultaneous fall of U.S. stocks and bonds, some unsettling signals have emerged in the cross-currency multi-asset markets that make investors uneasy. "It is highly likely that the U.S. dollar will break the century mark this year, with a time window in the second and third quarters," as expected, the U.S. dollar index broke through the psychological level of 100. At the same time, the Japanese yen has been one of the top-performing major currencies among developed countries, but Japan's main financial assets (Japanese bonds and stocks) have shown weakness. Funds are now flowing from the U.S. market, which has shown the best performance and highest interest rates in the past two years, to Japan, which has the lowest borrowing rates and the most abundant liquidity. However, after the funds flow back to Japan, they are not buying Japanese assets. A reasonable explanation is that a significant amount of the "cheap loans" coming from Japan in the past are being repaid early or no longer renewed, which is deleveraging globally. Because the yen is the easiest money to obtain on this planet, Japanese banks are also the creditors for most multinational financial institutions. And the magnitude is not small - from the second quarter of 2021 to the second quarter of 2024, the cumulative increase in yen-denominated cross-border financing will reach 19 trillion yen to 65 trillion yen, refreshing the historical record (roughly around 450 billion U.S. dollars at the current exchange rate, considering the continuous devaluation of the yen in recent years, this number will actually increase by 30%-40%). The most cost-effective funds are deleveraging, and the market naturally begins to worry about a global liquidity crisis. In fact, all crises are debt crises in disguise under another "narrative" crisis. The "dot-com bubble" began to be inflated by the market from 1995 until its peak in the first quarter of 2000, with an increase of up to 220% during that period. Why did the dot-com bubble not burst after the greatest surge in 1997-1998, but began to unravel in the second quarter of 2000? Similarly, the housing bubble of 2006-07 was already very obvious, and some mortgage loans had started to default, but it was not until the second quarter of 2008 that the market began to recognize the seriousness of the so-called "subprime crisis" problem. The answer lies in the fact that these time points coincided with a significant increase in corporate debt maturities in the U.S. Because of the bankruptcy mechanism of U.S. companies, compared to government bonds, corporate sector debt is more thinly guaranteed and endorsed, with higher moral risks and more likely to be the "weakest link" in the debt chain. Asset prices' bubbles are always elastic, but debt is rigid. As a short-term irrefutable optimistic "narrative" (such as the internet revolution or continuous rise in housing prices) becomes priced into the market, economic expectations rise, leading to inflation expectations and higher policy interest rates. At the same time, as debt rises in tandem with the market, the latter, less responsive due to its rigidity, is reflected in the misleading decline in debt metrics (because the numerator grows faster than the denominator). In essence, debt costs (maturity and interest rates) rigidly rise, while assets become bubbly. Finally, what is falsified along with the "narrative" is the debt-servicing ability of corporations (debt levels and interest rates rise but profitability and asset value begin to shrink), defaults and contagion are inevitable. Afterwards, debt default begins to spread among companies via widening credit spreads, and the economy begins to crisis. People naturally blame the default of debts on the "narrative," which this time might be the "American exceptionalism" or the impact of Trump's trade policies, or a combination of both. But what it actually is does not matter, the key is that "the music has stopped, and the dance party has ended." Debt crises are often remembered for their "crumbling towers, falling waves" moments. But from historical experience, the entire downward cycle of U.S. debt starts at this point, and the impact of debt is difficult to fully unleash in the short term, because the enormous amount of low-interest debt accumulated during the upward cycle will continue to mature in the future. So, what stage has the liquidity problem currently evolved into? We provide three observatory milestones: 1. The onshore and offshore liquidity premium of the U.S. dollar (CP-OIS & SOFR-OIS), which represents the adequacy of the U.S. dollar in the currency market. Recently, both have accelerated widening, but overall, they are still at relatively low historical levels, indicating that there is not yet a liquidity risk in the U.S. currency market (as seen during the subprime crisis or the impact of the COVID-19 pandemic). 2. The U.S. dollar index, the main observation milestone is the downward slope and the change in negative contribution of the Japanese yen in it, which can be used as a gauge for global deleveraging rate. Since February, the U.S. dollar index has plunged, with the downward slope almost reaching the levels of the major liquidity shocks in 2001, 2008, and 2023, while funds are flowing back to the Japanese market for safety, and the yen is rapidly strengthening. Currently, only this indicator shows danger. 3. The OAS (option-adjusted spread) of U.S. investment-grade (IG) and high-yield (HY) bonds, the absolute value and upward slope of this index tend to coincide with corporate bankruptcies, leading the Federal Reserve's core intermediate variable - the unemployment rate and may also be a leading indicator for the later Fed easing. In recent months, U.S. credit bond OAS has quickly risen, indicating increasing debt default risk, already reaching the levels in 2007 when the Fed made significant interest rate cuts, but still far from the two historical peaks (end of 2008 and the March 2020 when the Fed "presented" zero policy rates + QE policy combination), indicating that credit risk is just beginning to be released. Currently, from the indicators, it seems that the liquidity crisis is just beginning to emerge. When all three types of indicators are at levels of historical crisis moments, especially when the credit spread premiums are "realized" as dire, this is where the real danger lies.Online sales are on the rise (though not yet), and the chain reaction of corporate defaults, layoffs, and increasing unemployment rates has begun to unfold.In the current situation where the unemployment rate is close to the natural unemployment rate (4.2-4.3%), if it rises by another 0.5%, it will trigger the "Samuelson rule" again. The weight of employment in the central bank's decision-making function may rise above inflation, and the Federal Reserve may loosen its policies when there are sufficient conditions. Of course, the stability of the financial markets is also one of the policy benchmarks of the Federal Reserve. Before the warning signs of the above indicators appear, the US stock and bond markets may experience greater volatility, which could prompt the Fed to start loosening its policies, a scenario that cannot be ignored. It is important to note that rescuing the Fed and being able to be rescued by the Fed are two different things. Currently, in addition to facing the specter of inflation brought by tariff policies, the Fed must also be wary of the interest rate differentials between itself and other major economies narrowing further, accelerating the outflow of funds from the US. The Fed's operating space, compared to previous crises, is somewhat limited, which may also be a reason for the Fed's hesitation. In addition to the Fed, Trump's changes in tariff policies cannot be ignored as one of the core drivers of market risk appetite. Market participants believe that a compromise between the Fed and the White House could potentially alleviate the current liquidity issues and restore risk appetite for US dollar assets. We provide the following three hypothetical scenarios for investors to consider: Pessimistic: Neither the White House nor the Fed makes concessions. The path is: peak debt maturity rise in OAS decline in US stocks the Fed is "lagging behind the curve" in terms of inflation expectations brought about by tariffs and is unwilling to ease policy prematurely in the absence of data evidence. At the same time, the White House continues to insist on tariffs, leading to a "Max version" of 2022 - similar to stagflation in the 1970s, with global risk appetite continuing to decline. Baseline: Either the White House or the Fed makes concessions. The path is: peak debt maturity rise in OAS continued decline in US stocks triggering the Fed's policy benchmark of maintaining financial market stability, or forcing the White House to further compromise on tariff policies (such as further postponement or complete cancellation), improving market risk appetite, and ending deleveraging. Optimistic: The White House takes the initiative to make concessions (from the current statements, the probability of the Fed preemptive easing is low, and time may be running out). Against the backdrop of the continued acceleration of the three killings in stocks, bonds, and exchange rates, an acceleration of capital outflows may lead to the White House making concessions early. If the tariff policy compromises with the economic and financial difficulties, market risk appetite may reverse before a large number of corporate bankruptcies occur. Risk warning: US stocks continue to decline significantly beyond expectations, directly leading to an economic recession in the US; Trump prioritizes reducing inflation and interest rates, even at the risk of causing a deep recession. This article is from the "Global Macro Outlook" public account; GMTEight Editor: Li Fo.