Arthur Hayes: Trump tariffs trigger avalanche in markets, Bitcoin bottom has emerged

Original title: " Ski Cut"

Organize & compile: Patti, ChainCatcher

My Hokkaido ski season ended successfully in mid-March this year. However, the lessons learned from the mountain unexpectedly resonated with Trump's tariff storm. Every day is unique, full of various interaction variables – you can never predict which snowflake or the steering of a snowboard will trigger an avalanche. What we can do is to try to estimate the probability of triggering an avalanche. In skiing, there is a technique called ski cutting, which can more accurately assess the instability of slopes.

Before skiing, one of the skiers on the team would cross the starting area and try to trigger the avalanche by jumping up and down. If triggered successfully, the way instability spreads will determine whether the guide considers the slope suitable for skiing. Even if the avalanche is triggered, we may still choose skiing, but we must choose the direction carefully to avoid triggering a larger avalanche. If we see cracks expanding or huge plates loose, we will evacuate immediately.

Applying this kind of skiing wisdom to the financial market, Trump’s self-proclaimed “Liberation Day” on April 2 is undoubtedly a bold cut to the steep and dangerous slope of the global financial market. Trump's team's tariff policies draw on the economics book "Balanced Trade: Ending the Unbearable Cost of the U.S. Trade Deficit" and take an extreme stance. The announced tariff rates are so high that they even exceeded the worst expectations of mainstream economists and financial analysts. In terms of avalanche theory, Trump's move triggered a continuous weak avalanche, threatening to destroy the entire false partial reserve statutory financial system.

The initial tariff policy brought the worst outcome, as both the United States and China took an extremely opposing stance. While the financial asset market has experienced a drastic sell-off that has resulted in trillions of dollars in losses worldwide, the real concern is the surge in the MOVE index, which measures the volatility of the U.S. bond market. The index almost hit an all-time intraday high of 172, before the Trump team quickly fled the dangerous area. Within a week after the tariff announcement, Trump eased plans and suspended tariffs on all countries except China for 90 days. Immediately afterwards, Boston Fed Chairman Susan Collins posted in the Financial Times, saying that the Fed will take all necessary measures to ensure the normal operation of the market. A few days later, when volatility continues to rise, U.S. Treasury Secretary Scott Besent said in an interview with Bloomberg that his department will significantly accelerate and increase the pace of Treasury bond buybacks. This series of events, I describe as a drastic shift in policy makers from “everything is OK” to “everything is terrible, we have to do something.” The market soared, and most importantly, Bitcoin bottomed out and rebounded. Yes, I declared a local bottom of $74,500.

Whether you see changes in Trump’s policy as a retreat or a smart negotiation strategy, the fact is that the government deliberately triggered an avalanche of financial markets, and it was so serious that they had to adjust their policies a week later. As market participants, we now have some valuable insights. We understand the volatility performance of bond markets in the worst-case scenario, the level of volatility triggering changes in market behavior, and how policymakers will pull currency leverage to ease the situation. Using this information, we, as Bitcoin holders and activist investors, firmly believe that the bottom has arrived. Because the next time Trump strengthens tariff remarks or refuses to lower tariffs on China, Bitcoin will rise due to the expectation that monetary authorities will make every effort to start the printing press to ensure that bond market volatility remains sluggish.

Why do tariffs cause dysfunction in the bond market?

This article will explore in depth why taking an extreme tariff stance can lead to dysfunction in the bond market, as shown in the MOVE index. I will then discuss Becente’s solution – Treasury bond buybacks, and how this move will inject a lot of dollar liquidity into the system (though technically, purchasing old bonds by issuing new bonds itself does not directly increase dollar liquidity within the system). Finally, I will compare the current Bitcoin and macro environment with the situation in which Becente’s predecessor Yellen increased Treasury bill issuance to exhaust the reverse repurchase program (RRP) in the third quarter of 2022.

After the FTX incident, Bitcoin hit a local low in the third quarter of 2022, and now, after Becent came up with his "non-quantitative easing" quantitative easing heavy artillery, Bitcoin hit a local low in this bull market in the second quarter of 2025.

The greatest pain

I want to reiterate that Trump’s goal is to lower the U.S. current account deficit to zero, and achieving this requires painful adjustments. Tariffs became his government's preferred tool. I don't care whether you think it's good or bad, nor do I care if Americans are ready to work in the iPhone factory for longer. Trump was elected in part because his supporters believed that globalization had caused them to suffer. His team, on the other hand, fulfilled their campaign promises wholeheartedly, putting the interests of "Main Street" (ordinary people) above "Wall Street". It's all based on the assumption that those around Trump can be re-elected along this path, but that's not a surefire.

Financial markets fell sharply on Liberation Day (the day Trump announced the tariff policy) because foreign exporters earned less or no dollars from the tariff policy, thus unable to buy too much or any U.S. stocks and bonds. Additionally, if exporters need to change their supply chains or even rebuild their supply chains in the United States, they must fund the reconstruction by selling their holdings of current assets, such as U.S. bonds and stocks. This has led to the collapse of the U.S. market and any market that is overly dependent on U.S. export revenue.

However, at least in the initial stage, there is good news that frightened traders and investors are pouring into the Treasury bond market. Treasury bond prices rise and yields fall. The 10-year Treasury yield fell sharply, which is good news for the U.S. Treasury Secretary because it helps him bring more Treasury bonds to the market. However, the sharp fluctuations in bond and stock prices have boosted market volatility, which is deadly for some types of hedge funds.

Hedge funds, as the name implies, sometimes hedge risks, but they always use a lot of leverage. Relative value (RV) traders usually identify the relationship or spread between two assets and use leverage to buy one asset and sell another, expecting the spread to return to the mean. From a macro perspective, most hedge fund strategies implicitly or explicitly short market volatility. When volatility decreases, mean regression occurs; but when volatility increases, the market will fall into chaos and the stable "relationship" between assets will collapse. This is why when market volatility rises, risk managers of banks or exchanges (who explicitly or implicitly provide leverage to hedge funds) raise margin requirements. Hedge funds must close their positions immediately when they receive margin notices to avoid liquidation. Some investment banks are happy to force their clients to close their positions through margin notices during extreme volatility, thus taking over the bankrupt client’s positions and profiting when policy makers print money to curb volatility.

What we really care about is the relationship between stocks and bonds. Since U.S. Treasury bonds are nominally regarded as risk-free assets and global reserve assets, Treasury bond prices rise when global investors flee the stock market. This makes sense because the banknotes have to be put somewhere to earn profits, and the U.S. government will never voluntarily go bankrupt on the dollar because it is able to operate the printing press at zero cost. While the actual purchasing power of Treasury bonds may decline, policy makers do not care about the actual value of banknote assets that are flooding the world.

In the first few trading days after the "Liberation Day", stocks fell and bond prices rose/yields fell. However, something happened later, causing the bond price to fall along with the stock. The volatility of the 10-year Treasury yield has never been seen since the early 1980s. The question is, why is this happening? The answer, or at least what policy makers think, is crucial. Is there some structural problem in the market that must be solved by some form of printing money from the Federal Reserve and/or the Treasury Department?

The bottom panel of Bianco Research shows the abnormality of the three-day change in the 30-year bond yield. The degree of change caused by the tariff storm is comparable to market fluctuations during financial crises such as the 2020 COVID-19 pandemic, the 2008 global financial crisis, and the 1998 Asian financial crisis. This is not good news.

One possible problem is the lifting of the U.S. Treasury underlying trading positions by Relative Value (RV) funds. How big is this transaction?

February 2022 is an important month for the Treasury bond market as U.S. President Biden decided to freeze U.S. Treasury bonds held by Russia, one of the world's largest commodity producers. This move actually shows that no matter who you are, property rights are not rights, but privileges. As a result, foreign demand continues to weaken, but the relative value fund fills this gap and becomes a marginal buyer of Treasury bonds. The above figure clearly shows the increase in repurchase positions, which can be used as a proxy indicator of the size of the underlying trading position in the market.

Basic transactions

Basis Trade refers to the trading strategy in which investors buy spot bonds (cash-on-the-run bonds) and sell bond futures contracts at the same time. In such transactions, margin requirements on banks and exchanges are key factors. Relative Value (RV) funds are limited by the amount of margin required in their position size. Margin requirements change as market volatility and liquidity concerns change.

Bank margin

To obtain funds to purchase bonds, the foundation conducts a repo transaction, and the bank agrees to provide cash immediately for settlement at a small fee and use the bonds to be purchased as collateral. Banks will require a certain amount of cash margin as a guarantee for the repurchase transaction.

The more the bond price fluctuates, the more margin the bank requires.

The lower the liquidity of a bond, the more margin the bank requires. Liquidity is always concentrated on certain periods of the yield curve. For global markets, 10-year Treasury bonds are the most important and most liquid. When the latest 10-year bond is issued at auction, it became the current 10-year bond (on-the-run 10-year bond), with the strongest liquidity. However, over time, it will gradually move away from the center of liquidity and be regarded as an off-the-run. As current treasury bonds naturally transform into non-current treasury bonds, the amount of cash required to fund repurchase transactions will increase, while funds wait for the base spread to narrow.

Essentially, during high volatility, banks worry that if they need to clear the bonds, prices will fall rapidly, and there is not enough liquidity in the market to absorb their sell orders. Therefore, they increase margin limits.

Futures Exchange Margin

Each bond futures contract has an initial margin level that determines the amount of cash margin required for each contract. This initial margin level will fluctuate with changes in market volatility.

Exchanges are concerned with their ability to clear positions before the initial margin runs out. The faster the price fluctuates, the harder it is to ensure solvency; therefore, as volatility increases, margin requirements will also increase.

Relieve position concerns

The huge impact of basic treasury trading on the market and the way major players raise their positions has always been a hot topic in the treasury market. The U.S. Treasury Department’s Borrowing Advisory Committee (TBAC) provided data in its refinancing announcements over the past few quarters, confirming that marginal buyers of U.S. Treasury bonds have been relative value (RV) hedge funds engaged in underlying transactions starting in 2022. Below is a link to a detailed paper submitted to the Commodity Futures Trading Commission (CFTC), which relies on data provided by TBAC in April 2024.

This cycle of market chain events magnify fear in every cycle:

1. If the bond market volatility increases, RV hedge funds will need to pay more cash margin to banks and exchanges.
2. At some point, these funds cannot afford additional margin notices and must close positions at the same time. This means selling bonds that appear and buying back bond futures contracts.
3. As market makers reduce their quotation scale under a given price spread to protect themselves from toxic one-way flows, liquidity in the spot market declines.
4. As liquidity and price decline simultaneously, market volatility further increases.

Traders are well aware of this market phenomenon, and regulators and their financial journalists have also issued warning signals. Therefore, as the bond market volatility increases, traders will rush to move ahead of the forced sell-off, which aggravates the volatility of the market decline and causes the situation to deteriorate rapidly.

If this is a known source of market pressure, what policies can U.S. Treasury Secretary Becent (BBC) implement within its sector to keep the leverage (that is, leverage) flowing of RV funds?

Treasury bond purchase

A few years ago, the U.S. Treasury Department began implementing a buyback program. Many analysts have had extensive discussions on this, speculating how the plan will help certain money printing practices. Here, I will elaborate on my theory on the impact of repurchase programs on money supply. But first, let's take a closer look at how the program works.

The U.S. Treasury Department will issue new bonds and use the proceeds from the issuance to repurchase non-current bonds with poor liquidity. This move will boost the value of non-current bonds and may even make them exceed fair value, as the Treasury will become the largest buyer in a market with poor liquidity. For Relative Value (RV) funds, this means that the underlying spread between non-current bonds and bond futures contracts they hold will narrow.

Basic trading = spot bond long + bond futures short

The price of these bonds will rise due to the expectation that the Treasury will purchase non-current bonds, which will drive the long prices of spot bonds to rise.

Therefore, RV funds will choose to sell their current higher-priced non-current bonds and close their bond futures short contracts to lock in profits. This operation frees valuable capital from both banks and exchanges. Since RV funds are profitable businesses, they will reinvest their basic transactions in the next Treasury auction. As bond prices and liquidity rise, the volatility of the bond market decreases, thereby reducing the fund's margin requirements and allowing them to hold larger positions. This is the best manifestation of positive cycle reflectivity.

Now, market participants can rest assured that the Treasury is providing more leverage to the system through a repo program. Bond prices rise and the market stabilizes.

Becent (US Secretary of Treasury) proudly introduced his new tool in the interview. Theoretically, the Ministry of Finance can conduct unlimited repurchases because the repurchase transaction is essentially the process by which the Ministry of Finance issues new debts to repay old debts, which has been used to fund the principal payment of maturing bonds. The deal is cash flow neutral because the Treasury trades bonds at the same nominal value as the major dealer banks, without the need for additional Fed borrowings. Therefore, if the repurchase program can reduce market concerns about the collapse of the Treasury market and prompt the market to accept unissued bonds with lower yields, then Becente will make every effort to advance the repurchase program. This process will not be stopped, nor will it stop.

Treasury bond supply

Becente knew in his heart that the debt ceiling would increase at some point this year and the government would continue to increase spending frantically. He also knew that Elon Musk could not quickly cut spending through his Department of Government Efficiency (DOGE) for various structural and legal reasons. Specifically, Elon estimates that savings this year are now down to just $150 billion (at least relative to the huge deficit), while his previous estimate was $1 trillion a year. This leads to a clear conclusion: the deficit may actually widen, forcing Becent to issue more bonds.

For now, the deficit in the first three months of fiscal year 2025 is 22% higher than the deficit in the same period of fiscal year 2024. For Elon's sake—I know some of you would rather listen to Grimes' music burning in Tesla than face the reality that he's only started cutting spending for two months. However, it is even more worrying that the severity of tariffs and the impact of the impact of the tariffs, as well as the decline in the stock market, will lead to a sharp decline in tax revenue. This shows a structural reason: even if DOGE can successfully cut more government spending, the deficit will continue to expand.

What Bescent was worried about was that due to these factors, he had to increase his borrowing estimates for the rest of the year. With the upcoming torrent of Treasury bond supply, market participants will demand a significant increase in yields. Therefore, Becent needs RV funds to increase leverage and buy into the bond market frantically. Repurchase plans become particularly important as a result.

The positive impact of repurchases on US dollar liquidity is not as direct as central banks print money. Repurchases are neutral in terms of budget and supply, which is why the Ministry of Finance can conduct unlimited repurchases to create strong purchasing power for RV funds. Ultimately, this allows the government to finance itself at affordable interest rates. The more debts purchased through the banking system rather than private savings, the greater the increase in the amount of money. As the number of paper money increases, the only asset we want to own is Bitcoin.

Obviously, buybacks are not an unlimited source of US dollar liquidity. The number of non-current bonds that can be purchased is limited. However, a buyback is a tool that allows Becent to alleviate market volatility in the short term and raise government funds at an affordable level. This is why the MOVE index fell. With the stability of the treasury bond market, the fear of a complete collapse of the system has also disappeared.

Market environment

I compared this trading environment with the market environment in the third quarter of 2022. Sam Bankman-Fried (SBF) went bankrupt in the third quarter of 2022; the Fed is still raising interest rates, bond prices are falling, and yields are rising. Yellen, former chairman of the U.S. Federal Preparation Council, needs a way to boost the market so that she can pry the market's throat with red-soled high heels and issue bonds in large quantities without causing market resentment. In short, as it is now, market volatility is rising due to the shift in the global monetary system, which is a bad time to increase bond issuance.

RRP balance (white) and Bitcoin (golden)

Just like today, but for different reasons, Yellen can’t count on the Fed to relax policy as Powell is on a juggling-like journey of temperance inspired by Paul Volker. Yellen, or some cunning clever employee under her, correctly infers that by issuing more Treasuries, money market funds can induce interest-free funds in the reverse repurchase agreement (RRP) they hold into the leveraged financial system because these foundations are willing to hold them because Treasuries are slightly higher than RRP's yield. This allowed her to inject $2.5 trillion in liquidity into the market from the third quarter of 2022 to early 2025. During this period, the price of Bitcoin rose nearly 6 times.

This is a pretty bullish market environment, but people are scared. They know that high tariffs and the "separation" between China and the United States are not good for stock prices. They think Bitcoin is just a high beta version of the Nasdaq 100 index. They are bearish and do not understand how a harmless repurchase program will lead to an increase in the liquidity of the dollar in the future. They sit idly by and wait for Powell to relax his policies. However, he cannot directly relax policies or provide quantitative easing (QE) like his former Fed chairman from 2008 to 2019. Times have changed, and now the Ministry of Finance is the main force in printing money. If Powell really cared about inflation and the long-term strength of the dollar, he should have offset the impact of Yellen and current Treasury Secretary Becente's actions. But he didn't do that at that time, nor now; he will sit in a passive chair and let the situation develop.

Just like in the third quarter of 2022, when it was thought that Bitcoin could fall below $10,000, as a series of unfavorable market factors intertwined at the cycle low of around $15,000. Today, some believe that Bitcoin will fall below $60,000 from $74,500, and the bull market is over. Yellen and Bescent are not just a joke. They will ensure that the government receives funds at affordable interest rates and curb volatility in the bond market. Yellen injects a limited amount of RRP liquidity into the system by issuing more Treasury bonds instead of Treasury bonds; Becente will buy back old bonds by issuing new bonds and maximize the ability of RV funds to absorb and increase bond supply. Neither of these QE is known and recognized by most investors. Therefore, they missed the opportunity and once the market breakthrough is confirmed, they had to chase highs.

verify

For repurchases to become a net stimulus, the deficit must continue to rise. On May 1, through the U.S. Treasury Department’s quarterly refinancing announcement (QRA), we will know about future borrowing plans and comparisons with previous estimates. If Becente had to borrow more or expected to borrow more, this means tax revenue was expected to decline; therefore, the deficit would widen as spending remained the same.

Then, in mid-May, we will get official deficit or surplus data for April from the Treasury, which includes actual data on tax revenues from April 15. We can compare the year-on-year changes from fiscal 2025 to date and observe whether the deficit is expanding. If the deficit rises, bond issuance will increase and Becente must do everything he can to ensure that the RV fund can increase its underlying trading position.

Trading strategy

Trump's tariff policy, like skiers cutting steep and dangerous slopes, triggered an avalanche. We now know how much pain or volatility the Trump administration can tolerate before adopting any policy that the market believes will have a negative impact on the cornerstone of the statutory financial system (MOVE index). This will trigger a policy response, and its impact will increase the supply of US dollar that can purchase Treasury bonds.

If the frequency and scale of repurchases are not enough to calm the market, the Fed will eventually find a way to relax policies. They have said they will do so. Most importantly, they slowed down the rate of quantitative tightening (QT) at their recent March meeting, which is positive for future dollar liquidity. However, the Fed can do more than just QE. Here is a short list of procedural policies that are not QE but can increase the market's ability to absorb and increase Treasury bond issuance, some of which may be announced at the Federal Reserve meeting from May 6 to 7:

Relieve treasury restrictions on bank supplementary leverage ratio (SLR) by Treasury bonds. This will allow banks to purchase Treasury bonds using unlimited leverage.
Carry out a QT distortion operation to reinvest funds raised by maturity mortgage-backed securities (MBS) in newly issued Treasury bonds. The Fed's balance sheet size remains the same, but this will add $35 billion in marginal buying pressure to the Treasury market every month over the next few years until the total MBS volume matures.

The next time Trump presses the tariff button (which he will definitely do to make sure countries respect his authority), he will be able to ask for more concessions and Bitcoin won't collapse along with some stocks. Bitcoin knows that deflation policy cannot be maintained for a long time given the crazy debt levels required for the current and future financial system to operate.

Mt. Sharpe World's ski cutting triggered a Level 2 financial market avalanche, which could quickly escalate to Level 5, the highest level. But the Trump team responded, changed direction and opened up new paths for the empire. The foundation of the slope is consolidated by using powders made from the driest, best-quality dollar bills provided by the Treasury repurchase. It's time to go from climbing the snow-capped mountains with a backpack full of uncertainty to jumping off a powdery snow slope and screaming excitedly to see how high Bitcoin will fly.

As you can see, I'm very bullish. At Maelstrom, we have maximized our cryptocurrency exposure. Now, everything is about buying and selling different cryptocurrencies to accumulate Bitcoin. In the pullback of Bitcoin’s drop from $110,000 to $74,500, we bought a lot of Bitcoin. Bitcoin will continue to lead the trend as it is a direct beneficiary of future monetary liquidity injections designed to ease the impact of "separation" between China and the United States. Now, global communities see Trump as a lunatic who wields tariff weapons roughly, and any investor holding U.S. stocks and bonds are looking for something worth anti-establishment. In the physical realm, that is gold. In the digital realm, that is Bitcoin.

Gold was never seen as a high-beta version of U.S. tech stocks; therefore, when the overall market collapsed, it performed well as the oldest anti-establishment financial hedge. Bitcoin will get rid of its connection with technology stocks and return to the embrace of "only rising but not falling" with gold.

So, what about shitcoin?

Once Bitcoin breaks through the all-time high of $110,000, it could soar, further increasing its dominance. Maybe it will miss $200,000. The funds will then shift from Bitcoin to shitcoin. Copycat season is coming!

Apart from those shiny new shitcoins, the best performing tokens will be those related to projects that both make profits and give back profits to staking token holders. There are only a handful of such projects. Maelstrom has been actively accumulating positions in certain qualified tokens and has not yet completed the purchase of these gems.

They are gems because in the recent sell-off, they were smashed like all other shitcoin, but unlike 99% of the junk items, these gems actually have paid customers. Due to the large number of tokens, it is difficult to convince the market to give the project another chance after CEX issued tokens in the "only fall but not rise" model. shitcoin dumpster wants higher annualized yields (APYs) of pledges, which come from real profits because these cash flows are sustainable.

To promote our products, I will write a whole article to talk about some of these projects and why we think their cash flow generation will continue and increase in the near future.

Before this, increase your buying efforts and buy everything!