Market Overview - The Japanese stock market experienced significant declines, with the Nikkei 225 index falling by 2.58% and the Topix index down by 1.99% as of October 14 [2][3] - The decline is attributed to political instability following the announcement of the Komeito party's exit from the ruling coalition with the Liberal Democratic Party, raising concerns about the potential inability of the new LDP president, Sanae Takaichi, to assume the role of Prime Minister [2][3] Currency and Bond Market - The Japanese yen showed volatility, initially declining but later rising by 0.14% against the US dollar, reflecting increased demand for safe-haven assets amid global market uncertainties [4] - The yield on Japan's 20-year and 30-year government bonds increased by 0.15% and 0.81%, respectively, indicating a cooling interest in Japanese bonds despite the yen's safe-haven status [4] Economic Implications - Analysts suggest that the political turmoil in Japan is causing heightened investor caution, particularly affecting technology and banking stocks, which are sensitive to economic outlook and policy changes [3] - The potential for a new fiscal stimulus from a new government could lead to increased government debt issuance, raising concerns about fiscal sustainability and pushing bond yields higher [5][6] Interest Rate Outlook - The likelihood of a rate hike by the Bank of Japan has decreased significantly, with current market expectations placing the probability of a rate increase this month at only 10%, down from 63% earlier in October [6][7] - The uncertainty surrounding the new government's monetary policy direction, whether dovish or hawkish, adds to the complexity of the interest rate outlook in Japan [7]

Core Insights - The U.S. federal government recorded a budget deficit of approximately $1.8 trillion for the fiscal year 2025, nearly unchanged from 2024, with a slight reduction of $80 billion [1][2] - Despite a significant increase in tariff revenue, government spending growth outpaced fiscal improvements, highlighting fiscal vulnerability amid economic expansion [1] Revenue Summary - Federal government revenue increased by 6% year-on-year, amounting to approximately $3.08 trillion [1] - Customs revenue reached $195 billion, more than doubling from the previous year's $77 billion, largely due to new tariffs imposed by the Trump administration [1][2] - Corporate income tax revenue decreased by about 15% compared to 2024, attributed to the Tax and Expenditure Act allowing greater investment deductions for corporations [1] Expenditure Summary - Government spending grew by 4%, totaling approximately $3.01 trillion, with interest on public debt surpassing $1 trillion for the first time [1] - Social Security expenditures increased by $121 billion due to cost-of-living adjustments and new eligibility criteria for public sector employees [2] - Education Department spending plummeted by $234 billion, primarily due to student loan accounting adjustments and significant cuts to the department's functions [2] Fiscal Outlook - The estimated budget deficit as a percentage of GDP for fiscal year 2025 is approximately 5.9%, a slight decrease from 6.4% in the previous fiscal year [2] - The Treasury Secretary aims to reduce the deficit ratio to 3% by 2028, the end of Trump's term, amidst concerns over maintaining a deficit close to 6% during non-crisis periods [2]

Core Viewpoint - The Japanese ruling party, the Liberal Democratic Party (LDP), is set to elect a new party president on October 4, with a temporary national assembly scheduled for October 15 to select a successor to Prime Minister Shigeru Ishiba, marking the second prime minister in over a year for Japan [1] Group 1: Election Dynamics - Five candidates are competing for the LDP presidency: Minister of Agriculture, Forestry and Fisheries Shinjiro Koizumi, former Minister for Economic Security Sanae Takaichi, Chief Cabinet Secretary Yoshihide Suga, former Minister for Economic Security Takashi Kobayashi, and former LDP Secretary-General Toshimitsu Motegi [2] - The election has evolved into a three-way race among Yoshihide Suga, Shinjiro Koizumi, and Sanae Takaichi, with Suga gaining momentum and surpassing Takaichi in support among party lawmakers [2][3] - Despite Suga's rising support, he remains at a disadvantage in terms of votes from party members and supporters, with predictions suggesting a likely runoff between Koizumi and Takaichi [3] Group 2: Candidates' Policy Positions - The three leading candidates share similar campaign platforms focused on domestic economic and social issues while avoiding sensitive topics [4] - In foreign policy, all candidates advocate for strengthening the Japan-U.S. alliance, but they differ in specifics: Suga takes a pragmatic approach towards China, Koizumi emphasizes economic security, and Takaichi maintains a hardline stance [4] - In security matters, Suga proposes achieving a defense spending target of 2% of GDP by the fiscal year 2027, while Koizumi and Takaichi have differing views on military spending and capabilities [4] Group 3: Challenges Ahead - The new LDP president will face significant challenges due to the party's "double minority" status in both houses of the National Diet, necessitating frequent negotiations with opposition parties to advance policies [5] - Public sentiment towards the election is largely negative, with citizens expressing dissatisfaction over stagnant wages and rising living costs, indicating a demand for candidates who can propose clear fiscal stimulus and social welfare policies [6] - The LDP is grappling with a trust crisis due to past scandals, requiring the new president to implement effective reforms to regain public confidence and support [7]

Core Insights - The debt crisis is a systemic challenge for the global economy, significantly impacting financial stability, geopolitical dynamics, and market trends [1][17] - The rapid increase in U.S. federal debt, projected to reach $37.3 trillion by September 2025, poses risks to both domestic and international economic conditions [1][17] - Understanding the causes, manifestations, and potential consequences of the debt crisis is crucial for investors, economists, and policymakers [1] Causes of the Debt Crisis - The primary driver of the rapid growth in U.S. federal debt is the persistent budget deficit, with a projected deficit of $1.9 trillion for the fiscal year 2025, equivalent to 6% of GDP [2] - Tax cuts and increased spending, particularly from the Trump administration, have significantly reduced federal revenue, leading to an estimated $3.4 trillion increase in deficits from 2025 to 2034 [2] - Mandatory spending, including Social Security and Medicare, along with rising interest payments, are major contributors to the expanding deficit [2] Interest Costs and Market Dynamics - High interest costs exacerbate the debt issue, with projected interest payments reaching $952 billion in 2025, accounting for 18.4% of federal revenue [3] - The current high-interest environment, with a 10-year Treasury yield around 4.1%, has led to a significant increase in interest costs compared to previous years [3] - Rising bond yields across major economies signal a potential reset of the monetary system, affecting the value of the dollar and inflation pressures [4] Interconnectedness of Debt and Markets - The bond market, valued at over $50 trillion, is highly interconnected with equity and precious metals markets, with rising debt leading to increased borrowing costs [5] - The S&P 500 index has seen significant growth, but its valuation relative to GDP indicates potential bubble risks [5] - Gold has emerged as a hedge against currency devaluation, with prices rising from $1,770 per ounce in 2020 to $3,682 per ounce in 2025 [5][6] Geopolitical Implications - High debt levels limit diplomatic flexibility, particularly in U.S.-China relations, where China holds approximately $780 billion in U.S. debt [8] - The trend of de-dollarization is accelerating, with non-dollar trade increasing and central banks shifting towards gold as a primary asset [8] - Historical patterns suggest that high debt levels can lead to military conflicts as a means to divert public attention from domestic issues [8] Social and Political Consequences - Wealth inequality has reached historic highs, with 90% of stock market wealth concentrated among the top 10% of the population [9] - Public concern over the federal budget deficit is significant, but political divisions hinder effective reform [9] - The lack of coherent fiscal policy exacerbates the debt crisis, with differing approaches from political parties complicating solutions [9] Fiscal Management and Cash Flow - The U.S. Treasury General Account (TGA) has a balance of $410 billion, significantly below the target of $850 billion, necessitating frequent borrowing [10] - The short-term nature of U.S. debt makes the government sensitive to interest rate fluctuations, increasing refinancing costs [10] - The debt ceiling poses a significant risk, with potential market turmoil if Congress fails to raise or suspend it in a timely manner [11] Solutions and Future Outlook - Addressing the debt crisis requires a multi-faceted approach, including economic growth strategies, spending controls, and inflation management [13] - Long-term reforms should focus on balancing the budget, optimizing tax policies, and fostering international cooperation to attract foreign investment [15] - The next decade is critical for U.S. fiscal stability, necessitating decisive action to ensure long-term economic prosperity [16][17]

Core Viewpoint - The prevention and resolution of local government debt risks is a strategic task crucial to overall development, with significant progress made in the implementation of debt replacement policies since 2025, optimizing the debt structure and enhancing fiscal sustainability for high-quality economic development [1][2]. Group 1: Debt Replacement Progress - As of September 26, 2025, approximately 1.986 trillion yuan of the 2 trillion yuan debt replacement bond quota has been issued, achieving over 99% of the annual target [1][2]. - The issuance of "replacement hidden debt special bonds" has seen a notable extension in maturity, with over 700 billion yuan in 30-year bonds issued, and bonds with maturities over 10 years accounting for over 70% of the total [2][4]. - Regions such as Henan and Hubei have remaining quotas of 76.1849 billion yuan and 62.2886 billion yuan respectively, indicating a targeted approach to debt management [2][3]. Group 2: Policy Implementation and Management - The precise allocation of debt replacement resources is a key feature of the current replacement efforts, with the Ministry of Finance guiding localities in formulating bond issuance plans and managing the entire process [4][5]. - The replacement policies have begun to show effects across multiple dimensions, significantly reducing interest expenses and repayment pressures by replacing high-interest, short-term hidden debts with low-interest local government bonds [4][5]. Group 3: Long-term Mechanism and Fiscal Sustainability - The focus of debt management has shifted from emergency responses to a dual emphasis on regular prevention and the establishment of long-term mechanisms, enhancing fiscal sustainability [6][8]. - The Ministry of Finance has indicated plans to continue implementing a series of debt reduction measures, allowing local governments to access funds earlier to repay hidden debts and stabilize market expectations [6][7]. - A performance management system is being proposed to ensure the efficient use of debt funds, emphasizing the need for a shift from quantity management to quality improvement in debt utilization [7][8].

Core Insights - China's significant reduction of U.S. Treasury holdings in July 2025, amounting to approximately $25.7 billion, signals a critical shift in financial relations, as it coincides with a continuous increase in gold reserves, totaling about 74.02 million ounces [1][2] - The U.S. faces persistent fiscal challenges, including rising interest expenses and political gridlock, which exacerbate the situation and contribute to China's accelerated divestment from U.S. debt [3][4] - The recent diplomatic engagements between the U.S. and China, including a bipartisan congressional delegation visit, aim to stabilize market sentiment but may not address the underlying issues of trust and fiscal sustainability [2][3] Group 1: China's Actions - In July 2025, China reduced its U.S. Treasury holdings below $730 billion, marking a significant withdrawal from what was once considered a safe investment [1] - The increase in gold reserves and the reduction in U.S. debt holdings reflect a strategic shift away from reliance on the U.S. dollar, indicating a long-term reconfiguration of asset allocation [2][4] - China's actions are part of a systematic strategy to diversify its reserves and reduce dependency on the U.S. financial system, as evidenced by increased cross-border RMB payments and trade settlements [2][3] Group 2: U.S. Financial Landscape - The U.S. is experiencing a structural fiscal deficit, with rising interest payments and a lack of political consensus, which raises concerns about the sustainability of its financial policies [3][5] - The urgency of the U.S. to stabilize market conditions is evident, but the focus on short-term solutions may not suffice to rebuild long-term trust with China [4][5] - The market's reaction to these developments indicates a growing fear among investors regarding the stability of U.S. debt, as evidenced by fluctuations in bond yields following news of China's actions [4]

Political Instability - France is experiencing unprecedented political turmoil, with five prime ministers in less than two years, leading to governance issues and a fragmented political landscape [1][3] - The current prime minister, Le Cornu, faces significant challenges in passing the budget due to a divided parliament, which has resulted in a systemic paralysis of the government [3][10] Economic Concerns - France's public debt has surpassed €3 trillion, equating to 114% of GDP, with interest payments expected to reach €67 billion this year, exceeding the budgets of all government departments except for education and defense [3][4] - Rating agency Fitch has downgraded France's credit rating, increasing borrowing costs and raising concerns about fiscal sustainability [4] Social Unrest - A wave of protests has emerged, with unions mobilizing over 500,000 people against budget cuts perceived as unfair, particularly targeting welfare and education while the wealthy continue to benefit from tax breaks [6][7] - The protests have escalated into significant disruptions in public services, with one-sixth of teachers participating in strikes and power generation reduced by approximately 4,000 megawatts [6] Political Negotiations - The left-wing Socialist Party has seized the opportunity to demand significant budget changes, including halving budget cuts and introducing a 2% tax on wealth exceeding €100 million, creating a standoff with the right-wing and business associations [10] - The government must navigate a complex political landscape where satisfying one faction risks alienating another, making it difficult to pass the budget [10][11] Future Outlook - While some economists express cautious optimism about France's economic fundamentals, others warn of a potential collapse if political reforms are not enacted [11] - The ability of the government to break the budget deadlock and restore public confidence will be crucial in determining whether France can avoid becoming the "sick man of Europe" [11]

Market Performance - The US stock market experienced a decline on September 16, with all three major indices closing lower: Dow Jones down 0.27% at 45757.90 points, Nasdaq down 0.07% at 22333.96 points, and S&P 500 down 0.13% at 6606.76 points [1][3] - In contrast, Chinese assets performed well, with the Nasdaq China Golden Dragon Index rising 1.76%, reaching its highest level since February 2022 [1][3] Chinese Stocks - Popular Chinese stocks saw significant gains, with NIO rising over 8%, Baidu over 7%, JD.com and iQIYI over 3%, and Alibaba over 2% [1][3] Gold Market - International gold prices reached new highs, with London spot gold exceeding $3700 per ounce and COMEX gold futures approaching $3740 per ounce [5][6] - The recent surge in gold prices is attributed to three short-term catalysts: rising expectations for interest rate cuts by the Federal Reserve, increased pressure from President Trump on the Fed's monetary policy, and growing concerns over fiscal sustainability leading to a sell-off of long-term bonds [8] Federal Reserve Expectations - According to CME's "FedWatch," the probability of a 25 basis point rate cut this week is 96.1%, while the probability of a 50 basis point cut is 3.9% [8] - Looking ahead, Goldman Sachs forecasts that if the Fed's credibility is damaged, gold prices could soar to nearly $5000 per ounce as investors shift some of their US Treasury holdings into gold [8]

Core Viewpoint - The recent appointment of Indonesia's new finance minister has led to market volatility, with concerns over fiscal sustainability arising from aggressive fiscal policies aimed at stimulating the economy amid signs of economic fatigue [1][2]. Group 1: Market Reactions - The dismissal of the former finance minister, known for strict fiscal discipline, resulted in significant market reactions, including a 5 basis point increase in the yield of Indonesia's 10-year government bonds to 6.4% and a capital outflow of 14.24 trillion Indonesian rupiah (approximately 8.67 billion USD) within three days [2][3]. - The capital outflow included 6.57 trillion Indonesian rupiah from the central bank's securities and 5.45 trillion Indonesian rupiah from government bonds, indicating deep investor concerns regarding fiscal sustainability [2][3]. Group 2: Government Initiatives - In response to market turbulence, the Indonesian government announced a capital injection of 200 trillion Indonesian rupiah (approximately 121.8 billion USD) into several banks to encourage lending to the real economy and small and medium enterprises [2][3]. - The new finance minister emphasized that this liquidity support reflects a commitment to proactive fiscal expansion [3]. Group 3: Investor Sentiment - International investors have mixed views on Indonesia's bond market, with some asset management firms like BlackRock expressing optimism about long-term government bonds, while others, such as Fidelity and PIMCO, remain cautious, stressing the importance of fiscal discipline [4][5]. - The potential for capital inflows into Indonesian bonds may depend on the government's ability to maintain fiscal discipline and stabilize the exchange rate [4][5]. Group 4: Economic Indicators - Despite overall robust economic growth, signs of weakness are emerging, with a decline in the consumer confidence index and a slowdown in retail activity [7]. - The government has introduced a new economic stimulus plan to boost growth and support household consumption, funded by reallocating underutilized budget resources [7][8].

Report Industry Investment Rating The document does not provide the industry investment rating. Core Viewpoints of the Report - The central bank's bond purchase is approaching, which is conducive to the sustainability of fiscal expansion and may be implemented in Q4 or even October. - The early issuance of replacement bonds in Q4 is not the baseline expectation. If it happens, the probability of the central bank restarting bond purchases will increase. - The significance of the inflection point of social financing has declined, but the pressure on the fundamentals will gradually emerge, which will bring some support to the bond market. - At the current position, there is no need to be overly pessimistic about bonds. In the short - term, investors can play the rebound and wait for the central bank's bond purchase to be implemented later. [2][3] Summary According to the Directory 1. The central bank's bond purchase is conducive to the sustainability of fiscal expansion - The net supply of government bonds has been increasing, with a 3 - year compound growth rate of 24% from 2022 - 2025, and the proportion of bond interest payments in fiscal expenditure has reached 4.5% in 2024. Future government bond issuance is likely to remain high. - Commercial banks' ability to absorb government bonds has declined, leading to frequent "flying" in the primary issuance of government bonds this year. - Low - interest rates are crucial for fiscal sustainability. In Japan, lower interest rates have supported continuous fiscal expansion. In China, a 10BP increase in bond issuance interest rates in 2025 would increase fiscal interest payments by 22.6 billion, and a 10BP increase in the average cost of existing debt could lead to an increase in interest - payment costs of over 100 billion. [8][9][13] 2. The central bank's recent measures to improve bond market liquidity may be preparations before bond purchases - The second meeting of the joint working group of the Ministry of Finance and the central bank in early September is regarded as a signal for the central bank to restart bond purchases. - The central bank may want to improve the bond market infrastructure first to reduce the impact of its bond - buying behavior on the yield curve. - In July, the central bank proposed to cancel the freeze on collateral for bond repurchases, and on September 12, the China Central Depository & Clearing Co., Ltd. and the National Inter - bank Funding Center announced a centralized bond lending business, which may increase market liquidity. The central bank may restart bond purchases in Q4 or even October. [20][27][29] 3. The early issuance of replacement bonds in Q4 is not the baseline expectation. If it happens, the probability of the central bank restarting bond purchases will further increase - The statement of "pre - allocating part of the new local government debt quota for 2026 and using the debt - resolution quota earlier" does not necessarily mean the early issuance of 2 trillion replacement bonds in Q4. The new debt quota mentioned may refer to 80 billion of new local special bonds for debt resolution, and early allocation of this quota has been a common practice since 2019. - It is estimated that the average monthly net financing of government bonds in Q4 is about 633.5 billion. Unless there is a significant decrease in fiscal deposits in September, the early issuance of replacement bonds in Q4 is not the baseline expectation. Even if they are issued early, the central bank is likely to take measures to maintain liquidity, increasing the probability of bond purchases in Q4. [30][35][39] 4. The significance of the inflection point of social financing has declined, but the pressure on the fundamentals will gradually emerge - In August, the new social financing was 256.93 billion, slightly higher than expected but with a year - on - year decrease. Credit and government bonds were the main drags. The social financing growth rate dropped to 8.8%. - The significance of the social financing inflection point has decreased since 2021 due to the weakening impact of the real - estate cycle. However, the pressure on the fundamentals is increasing, as shown by weak export and inflation data in August and slow improvement in high - frequency data such as real - estate sales and construction - related indicators. This may support the bond market. [40][48] 5. At the current position, there is no need to be overly pessimistic about bonds. In the short - term, play the rebound and wait for the central bank's bond purchase to be implemented later - Although the bond market may face external disturbances such as the implementation of the redemption - fee new rule and the adjustment of the tax - exemption policy for public - fund dividends, after the 10 - year government bond yield reached 1.83%, panic has been largely released. - The large - scale buying by the allocation portfolio last week indicates that the interest rate may have reached the top. - It is recommended to play the short - term interest - rate rebound, keep a neutral position, and reserve funds for further investment. 3 - 5 - year policy - financial bonds and secondary bonds have increased in allocation value, while long - term bonds may be affected by the equity market and should be watched in the short - term. [49][52]