For once, the sun might set in the East

On such pillars, the world rests

Japan’s 10-year bond yield just hit 1.95%. The highest since 2007.

I know. Bond yields. Riveting stuff. (forced) Yay! But stay with me here because this might be the single most important chart in global finance right now. And besides a few accounts on X, nobody in Western financial media seems to be aware of it.

For decades, Japanese institutional money - life insurers, pension funds, megabanks - has been chasing yield abroad. Why? Because domestic returns were zero. Or negative. Imagine being a Japanese pension fund manager in 2019, staring at a -0.28% yield on 10-year government bonds. Your options were simple: buy foreign assets or explain to retirees why their money was literally shrinking.

So they bought **everything**. American Treasuries. European bonds. US equities. Trillions of yen flooding into Western markets, suppressing yields, inflating asset prices. This has been the financial plumbing of the last two decades.

And now that trade is reversing.

Japanese inflation has exceeded the Bank of Japan’s 2% target for 43 consecutive months. Forty-three!! After decades of deflation, Japan suddenly has an inflation problem. The BOJ is finally responding. The December meeting carries roughly 80% odds of another rate hike to 0.75%. Governor Ueda said it explicitly in his November speech: US tariff risks are fading, conditions for tightening exist.

The era of free yen is ending.

But the BOJ is simultaneously reducing its bond purchases from ¥5.7 trillion (~37B$) to ¥3.3 trillion (~21B$) per month. And at the very worst possible time, Prime Minister Takaichi (yup, politicians…) just announced a ¥11.7 trillion (~75B$) stimulus package - 1.7 times larger than her predecessor’s.

More supply + less demand = exploding yields

The 30-year JGB hit an unprecedented 3.436% on Thursday. The entire Japanese yield curve is repricing in real-time.

Some point to the graph above and say that the BOJ is reducing its balance sheet, but that’s misleading. Those bonds they bought in the past are marked-to-market. They’re hugely underwater, not shrinking!

And Japanese regional banks? blub-blub.

Their unrealized losses on domestic bond holdings surged to a record $21.3 billion by the end of September. That’s a 260% increase since March 2024 when the BOJ hiked rates for the first time since 2007. Five consecutive years of unrealized losses on bond holdings. The most severe price decline in JGB history.

This week alone, Japanese banks wanted to dump roughly ¥2 trillion in JGBs that the BOJ didn’t absorb. That selling pressure doesn’t just disappear. It moves to the open market. The BOJ conducted 148 market interventions since July 29th. Securities lending facilities. YCC purchases. Emergency operations dressed up as routine monetary policy. On Wednesday they ran six separate operations. Thursday, another round. Banks wanted to sell double what the central bank was willing to buy.

They’re calling this “normalization.”

You are led to believe bonds are boring. Feel boring yet? Feeling antsy? Well, it gets much more interesting!

Japan holds more than a trillion in US Treasuries. The largest foreign holder. Down about $105 billion from March 2024’s peak, but still enormous.

Think about the calculus for a Japanese life insurer today. Option A: buy a US Treasury yielding 4.5%, pay currency hedging costs that eat most of that yield, and accept the risk that yen appreciation wipes out your gains entirely. Option B: buy a domestic JGB yielding 1.9% with zero currency risk.

I know what I’d choose. The mood is shifting. Not dramatically. Not all at once. But shifting nonetheless.

Norinchukin Bank already announced it is selling $63 billion in US and European government bonds. They’re expecting to crystallize a record ¥1.5 trillion loss. One bank. Sixty-three billion dollars.

I should be fair here. Japanese investors actually purchased ¥11.7 trillion in overseas debt from January to October 2025. More than double what they bought in all of 2024. When the yen strengthened 4% in March, they didn’t flee - they bought more foreign assets. The repatriation story has nuance.

But that’s precisely what makes this dangerous. The flows haven’t reversed yet. The pressure is building. And we have a template for what happens when it releases.

August 2024. A single BOJ rate hike triggered a 12.4% single-day crash in the Nikkei. The VIX spiked above 60 - levels only seen during 2008 and COVID. The yen carry trade had accumulated somewhere between $250 billion and $500 billion in positions. When the BOJ hiked and the yen strengthened, the unwind was violent. Swift. Global.

That was with rates at 0.25%.

Now rates are heading to 0.75%. Yields are at 17-year highs. Regional banks are drowning in unrealized losses. And much of that carry trade remains unwound.

But this stress is not contained to Japan.

US 30-year yields just broke above key resistance while SOFR repo volumes explode. Long bonds are being dumped. That puts even more pressure on the banking system - already loaded with unrealized losses and collateral stress. So we got funding markets screaming for liquidity and long-end yields spiking at the same time… Anyone in the class knows what that is? Well… Guess what: signs of stress. Bonds selling off means deeper pain for bank balance sheets. The system is tightening from both ends.

And whaddaya thunk? Would central banks be honest about this? I’ll give you one guess… They are not.

This week the Bank of England lowered capital requirements for UK banks, claiming stress tests proved they’re solid. The first reduction in a decade. At the same time - and I mean the exact same time - the BOE lent roughly £97 billion through its Short-Term Repo facility. The highest since COVID. They’re calling it “destigmatized” participation in money markets. Routine. Nothing to see here.

The Fed is doing the same dance. Their Standing Repo Facility hit a record $50 billion in October. The reverse repo facility - that $2.5 trillion buffer that could absorb liquidity shocks - has collapsed to essentially zero. The cushion is gone. Any pressure on funding markets now falls directly on bank reserves. So what did the Fed do? Ended balance sheet runoff on December 1st. Earlier than expected. Quietly. The Bank Term Funding Program wound down to zero after expiring in March 2024. No successor announced.

Banks are solid though. Pinky promise.

The BOJ holds ¥567 trillion in JGBs - 51% of the entire market - and carries ¥28.6 trillion in unrealized valuation losses. The largest since current accounting began. They ended Yield Curve Control in March 2024 but explicitly retain intervention capability for “rapid rises in long-term interest rates.” The emergency infrastructure stays active. Just in case. For this totally normal, completely stable situation.

So while bond markets quietly threaten global financial stability, let me tell you something about Nvidia and China. Because it is... well, we’ve got to stay polite right? Well, it’s something...

On Tuesday, Nvidia CEO Jensen Huang met with President Trump at the Capitol. The topic: whether Nvidia can sell its H200 chips to China. Commerce Secretary Lutnick said the decision is now “directly in Trump’s hands.”

Huang’s response when asked if China would even accept the chips?

“We don’t know. We have no clue.”

Inspiring confidence there, Jensen.

The policy whiplash has been extraordinary. Biden’s January AI Diffusion Rule blocked H100/H200 sales. Trump extended the ban in April to even “compliant” chips. Then July brought a reversal - H20 and AMD’s MI308 approved for export. But with a twist: a 15% revenue fee paid directly to the Commerce Department. Lisa Su confirmed Thursday that AMD is “prepared to pay” this tax. Constitutional scholars are scratching their heads since the Constitution explicitly prohibits export taxes. But who reads that thing anymore?

Meanwhile, the bipartisan SAFE CHIPS Act introduced Thursday would block any loosening of restrictions for 30 months. Tom Cotton and Elizabeth Warren agreeing on something. That is how you know things are serious.

The chip that pops the AI bubble

Does China actually need American chips at this point?

Beijing ordered domestic tech firms to stop purchasing Nvidia entirely a while ago. ByteDance, Alibaba, Tencent - they’re all pivoting to Huawei’s Ascend chips. Plans call for 600,000 units in 2026, double 2025 production. Are they as good as Nvidia’s? No. Huawei admits “gaps still exist.” But White House AI Czar David Sacks estimates China lags the US by only 3-6 months now.

Three to six months. After years of export controls designed to maintain American dominance.

So what exactly did we accomplish? We accelerated Chinese semiconductor independence while cutting Nvidia off from a massive market. The sanctions accomplished the opposite of their stated goal. And now Trump is potentially reopening that market. Not because it is strategically wise. Because Nvidia needs the revenue to keep the AI narrative alive.

Look at the GS chart above. Excluding AI names, the S&P 500 has returned 8% annually since ChatGPT launched. Respectable. Normal. The S&P 500 including AI names? 20% annually. Nearly three times the return.

Strip out Nvidia, Microsoft, and their magnificent friends, and this market is... fine. Just fine. A pedestrian, historical-average kind of fine.

The Magnificent 7 now comprise roughly 37% of S&P 500 market cap. Concentration levels not seen in nearly a century. Nvidia alone contributed 20% of the index’s year-to-date return through September.

This is not a market. It is seven stocks wearing a trench coat pretending to be a market.

So when Jensen Huang shuffles into the White House hoping Trump will let him sell chips to China again, understand what’s actually happening here. It is bubble maintenance. NOT trade policy. The AI narrative needs another catalyst. China access - even at 15% tax, even with uncertain demand - provides that catalyst.

The alternative is admitting that Nvidia already wrote off China in their guidance. That reopening provides nothing but temporary stock pumpage. That the AI capex cycle might be showing signs of peaking.

Can’t have that conversation. Not when seven stocks are holding up the entire index.

I have written extensively about silver recently, so I will keep this brief. But precious metals are flashing signals that deserve attention alongside everything else.

Silver hit $58.95 on Tuesday. An all-time high. The metal has doubled in 2025 alone. Gold trades around $4,200, up roughly 60% year-over-year. More important than price is what’s happening in the physical market. Silver lease rates in London spiking. COMEX silver inventories dropping to yearly lows. Accelerating in recent months. $2-3 premium between spot & futures.

Interestingly, the SLV ETF has seen 27 million new ounces deposited since November 21st. This would mean that someone found a lot of silver somewhere because APs should be delivering silver to the vaults. Where is that metal coming from?

Make of that what you will.

The CNN Fear & Greed Index has oscillated between Fear and Extreme Fear throughout November and December. Lowest levels since early April. Yet the S&P 500 trades within 1% of its all-time high. Credit spreads sit near historic tights. The VIX has settled back to 16.

Precious metals and sentiment indicators are pricing in something. Japanese yields are signaling another. Central banks are quietly throwing around hundreds of billions in liquidity while publicly claiming their banking systems are rock solid. The AI bubble needs to be maintained at any price. And PMs are causing real systemic stress.

So what is it? Are we in Fear? As sentiment and PMs indicate? Or “Everything Is Fine” ™, as credit markets and equities proclaim?

Both cannot be true.

The BOJ meets December 18-19. The Fed meets December 9-10. Japanese regional banks need to sell bonds they cannot afford to hold. The carry trade sits there, waiting.

We got a preview in August last year. Global contagion from a single rate hike.

Rates are higher now. Yields are higher now. Unrealized losses are at records. The liquidity cushions are gone.

I won’t be surprised if in the coming months we’ll see another Silicon Valley, Signature or First Republic moment.

No1 is watching. But I am.

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PS.

Two readers ( Richard Roskell & Yoni Reinón [comment] ) pointed out things I missed.

First: The Cayman Islands story is even more interesting than reported.

Federal Reserve researchers found what official data obscured. TIC reports show Cayman holding $423 billion in Treasuries. The actual number? $1.85 trillion by the end of 2024. A $1.4 trillion discrepancy.

Between January 2022 and December 2024, Cayman-domiciled hedge funds absorbed 37% of net Treasury issuance, nearly matching all other foreign investors combined. When you account for that undercount? Cayman isn’t the fourth-largest foreign holder. It’s the largest. Bigger than Japan. Bigger than China. Bigger than the UK.

Of course, these aren’t actual Cayman investors. These money managers sit in New York or London. But the vehicles are registered in Cayman. For “reasons”.

The basis trade. Hedge funds buy Treasury bonds, short Treasury futures, and pocket the spread. They leverage it a 100 times through repo borrowing. “Low risk” on paper. Catastrophic when it unwinds. We saw a preview in August 2024 - a single BOJ rate hike triggered a global contagion. Now we’ve got $1.85 trillion in leveraged positions relying on short-term repo funding, executing trades designed for calm markets we no longer have.

And speaking of Cayman...

Seven of the world’s worst corporate tax havens are British-controlled: BVI, Cayman, Bermuda, Jersey, Guernsey, Isle of Man, and the UK itself. The UK and its network are responsible for 33% of the corporate tax abuse risks identified by the Corporate Tax Haven Index. The British Empire didn’t disappear. It evolved.

The Cayman Islands appears statistically as one of the world’s largest financial centers. But it’s only a paper center - most activities attributed to it actually take place in London. But registered in Cayman for tax purposes.

This offshore network dates to a 1957 Bank of England ruling. Offshore was invented. By Britain. In London. The empire swapped gunboats for shell companies. Soldiers for accountants.

So when Cayman holds $1.85 trillion in Treasuries, we’re really talking about the City of London backstopping US government debt through offshore jurisdictions it created and controls.

Richard also mentioned Nvidia and China. I went looking, and it seems the situation is worse than my original piece suggested.

China was 20-25% of Nvidia’s data center revenue before restrictions - high-end AI chips, not legacy nodes. But now? Mid-single digits. Its market share fell from 95% to essentially zero in less than two years.

Chinese authorities are investigating Nvidia for “antitrust violations” while pushing tech giants toward domestic alternatives. For example Cambricon Technologies posted a 1,332% jump in net profit. And Huawei is planning 600,000 Ascend chips in 2026.

After years of export controls designed to maintain American dominance, David Sacks (WHs AI Czar) estimates that China lags the US by only 3 to 6 months in AI capabilities.

DeepSeek runs on domestic chips. Chinese AI performs on par with American AI despite lacking cutting-edge hardware. The export controls didn’t stop China’s AI development. They just guaranteed Nvidia wouldn’t profit from it.