Since our last report a month ago, global capital markets have undergone dramatic changes. The Nasdaq and Dow Jones indices have surged sharply, U.S. Treasury yields have trended higher amid volatility, gold spiked before retreating, and crude oil prices have been edging upward within a narrow range. At the core of these market movements lies a singular driving force: the policy landscape shaped by Donald Trump. Each of Trump’s statements—particularly his repeated claim that “now is the best time to buy”—has marked a critical turning point for markets. The most significant shift has been in his stance on trade policy.
In our previous report, we predicted that it would be difficult to reach a tariff agreement within the 60-day suspension window—a judgment that has largely proven accurate. To date, only the U.S. and the U.K. have reached a preliminary memorandum-level tariff understanding. The arrangement between the U.S. and China does not yet qualify as a formal trade deal. From the market’s perspective, these developments signal that a 10% tariff imposed by the U.S. on all countries is now considered a baseline scenario. Consequently, U.S. Treasury yields have continued to climb, recently surpassing 4.5% at their peak. We entered two positions in U.S. Treasuries—first at 4.55% and then at 4.44%. This trend is not limited to the U.S.: bond yields in Japan and Europe have also accelerated. In Japan, yields have climbed 20 basis points in the short term.
We believe the rise in yields is closely linked to the increasing clarity around trade policy uncertainty. Although Trump has moderated his once-aggressive stance, opting instead for the Treasury Secretary’s original proposal of a gradual tariff approach, markets are already pricing in the looming inflation shock.
The U.S. Treasury Secretary has emerged as a key figure in Trump’s administration during this phase, gradually sidelining Elon Musk through internal persuasion and consolidating influence within the Cabinet. The capital markets have responded positively, with the Nasdaq and Dow posting significant rebounds—surpassing our expectations. While we realized gains in TSMC and gold, we remain cautious and do not believe risk appetite has fully returned.
The Treasury market is clearly pricing in higher global inflation. Once the initial impact of tariffs becomes apparent and wage income in the U.S. comes under pressure, the vulnerability of capital markets will be exposed. Current index levels in the Dow and Nasdaq seem to reflect a scenario in which tariff policies were never implemented—an assumption that is difficult to justify. Japan’s equity market has also returned to pre-tariff levels, despite steep tariffs on steel and automobiles, signaling a latent risk. In response, we have scaled back our risk exposure.
Another major development is the Fed’s announcement of a strategic overhaul of its five-year monetary policy framework. In a recent speech, Chair Powell indicated that the Fed would abandon the average inflation targeting regime. The new stance suggests a departure from the pre-pandemic era of low rates, low growth, and low unemployment, pivoting instead to a framework better suited to an environment of sustained high inflation. This implies that rate cuts are unlikely during Powell’s tenure, which ends in 2026. Nevertheless, we remain long-term bullish on gold, as we believe the U.S. will eventually resort to rate cuts to adapt to its policy realities.
Lastly, the issue of U.S. fiscal sustainability has come under increased scrutiny. Trump is currently touting his “beautiful” tax cut proposal, the scale of which is unprecedented. However, global institutional investors have begun to question the long-term viability of U.S. public finances. The Treasury market faces ongoing selling pressure driven by the tariff negotiations, compounded by a short-term refinancing cliff. Although the Republican Party controls both chambers of Congress, significantly raising the debt ceiling still requires bipartisan support.
With the Fed’s hawkish posture and public debt already at 100% of GDP, every 20-basis-point increase in yields translates into substantial refinancing costs and fiscal deficits. The abrupt collapse of Musk’s “Efficiency in Government” department highlights the futility of attempts to rein in the deficit. Further monetary expansion appears highly probable. While temporary relief from a debt crisis may boost market sentiment in the short term, it simultaneously fuels inflation expectations. Ultimately, the balance point lies with the Fed.
In such an environment, we believe it is crucial to manage equity risk exposure carefully. Only once these uncertainties gradually resolve should investors consider increasing their risk allocations.