Hayes: In-depth analysis of tariff wars and national debt and why BTC will break new highs again

Author: Arthur Hayes, Founder of BitMEX; Translator: AIMan@Golden Finance

For me, the Hokkaido ski season ended in mid-March this year. However, the lessons learned from the mountain can still be applied to President Trump's "tariff rage". Every day is different, and there are too many variables interacting - no one knows which snowflake or which turn of the skis will trigger an avalanche. The best we can do is estimate the probability of triggering an avalanche. A more accurate technique for assessing slope instability is ski-cutting.

Before going downhill, a skier in the team will cross the starting area and jump up and down in an attempt to trigger an avalanche. If successful, the way the avalanche spreads on the slope will determine whether the guide considers the slope suitable for skiing. Even if an avalanche is triggered, we can still continue skiing, but choose the direction of sliding carefully to avoid triggering more serious consequences than a loose powder slide. If we see cracks or huge snowboards loose and cracking, leave quickly.

The key is to try to quantify the worst-case scenario based on the current conditions and act accordingly. Trump’s self-proclaimed “Liberation Day” on April 2 was a ski-cut to the steep and dangerous side of global financial markets. Team Trump’s tariff policy borrowed from a book on trade economics called “Balancing Trade: Ending the Unbearable Cost of America’s Trade Deficits” and took an extreme stance. The announced tariff rates were worse than the worst-case estimates of mainstream economists and financial analysts. In the words of avalanche theory, Trump triggered a continuous avalanche of weak layers that threatened to destroy the entire fugazi (from the US military during the Vietnam War, meaning fake things) fractional reserve filthy fiat currency financial system.

The initial tariff policy represented the worst-case outcome because both the United States and China took extreme positions and opposed each other. Although financial asset markets fluctuated wildly, resulting in trillions of dollars in global losses, the real problem was the rise in volatility in the US bond market (measured by the MOVE index). The index rose to an all-time high of 172 points during the session before Team Trump pulled out of the danger zone. Within a week of announcing the tariff policy, Trump eased off his plan to suspend tariffs on all countries except China for 90 days. Then, Boston Fed Governor Susan Collins wrote in the Financial Times that the Fed stood ready to do whatever it took to ensure that markets functioned properly. A few days later, volatility failed to fall significantly. Finally, US Treasury Secretary Scott Bessant gave an interview to Bloomberg and declared to the world that his department was huge, especially because it could significantly increase the pace and size of Treasury buybacks. I described this series of events as a shift from "everything is fine" to "everything is terrible, we must act," as policymakers soared and, most importantly, Bitcoin bottomed. That's right, folks, I predicted $74,500 as a local low.

Whether you characterize Trump's policy changes as backpedaling or astute negotiating tactics, the result is that the government deliberately triggered an avalanche in financial markets, and it was so severe that they adjusted their policy a week later. Now, as a market, we know something. We understand what happens to bond market volatility in a worst-case scenario, we recognize the volatility levels that trigger behavioral changes, and we know what monetary levers will be pulled to mitigate that. Using this information, we as Bitcoin holders and crypto investors know that a bottom is in place because the next time Trump ratchets up tariff rhetoric or refuses to reduce tariffs on China, Bitcoin will rise in anticipation of monetary officials running the printing press at maximum levels to ensure bond market volatility remains low.

This article will explore why taking an extreme stance on tariffs leads to a dysfunctional Treasury market (as measured by the MOVE index). I will then discuss how U.S. Treasury Secretary Bessent’s solution – Treasury bond repo – will add a significant amount of USD liquidity to the system, even though issuing new bonds to buy old bonds does not technically add USD liquidity to the system per se. Finally, I will discuss why the current situation for Bitcoin and the macroeconomy is similar to the situation when Bessent’s predecessor, Yellen, increased Treasury issuance in Q3 2022 to exhaust the Reverse Repo Program (RRP). Bitcoin hit a local low after FTX in Q3 2022 and now hits a local low in this bull cycle in Q2 2025 after Bessent launched his “non-QE” QE.

Maximum Pain

I will reiterate that Trump’s goal is to get the US current account deficit to zero. Getting there quickly requires painful adjustments, and tariffs are his administration’s go-to trick. I don’t care if you think this is good or if Americans are ready to work 8+ hour shifts in iPhone factories. Trump was elected in part because his supporters believe that globalization has killed them. His team is hell-bent on delivering on a campaign promise to, in their words, prioritize “Main Street” over “Wall Street.” All of this is based on the assumption that someone close to Trump can get re-elected this way, which is not a sure thing.

The reason financial markets crashed on Liberation Day is that if foreign exporters were earning fewer or no dollars at all, they couldn’t buy as many or even any U.S. stocks and bonds. Furthermore, if exporters had to change their supply chains or even rebuild them within the U.S., they would have to finance that rebuilding in part by selling their holdings of liquid assets, such as U.S. bonds and stocks. That’s why U.S. markets, and any market that was overly dependent on U.S. export revenues, collapsed.

The silver lining, at least initially, was that fearful traders and investors piled into the U.S. Treasury market. Treasury prices rose and yields fell. The 10-year Treasury yield fell sharply, which was good for Bessent because it helped him put more bonds on the market. But the wild swings in bond and stock prices exacerbated market volatility, which was a death knell for certain types of hedge funds.

Hedge funds, hedge…sometimes, but always, use a lot of leverage. Relative Value (RV) traders typically identify a relationship or spread between two assets, and if the spread widens, they use leverage to buy one asset and sell the other, anticipating a mean reversion. Generally speaking, most hedge fund strategies implicitly or explicitly short market volatility at a macro level. When volatility falls, mean reversion occurs. When volatility rises, things get messy and the stable "relationship" between assets breaks down. This is why risk managers at banks or exchanges that provide leverage to hedge funds raise margin requirements when market volatility rises. When hedge funds receive margin calls, they must close their positions immediately or they are liquidated. Some investment banks are happy to bankrupt their clients by issuing margin calls during periods of extreme market volatility, taking over their bankrupt clients' positions, and then profiting when policymakers inevitably print money to suppress volatility.

What we really care about is the relationship between stocks and bonds. Since U.S. Treasuries are nominally a risk-free asset and the global reserve asset, when global investors flee stocks, U.S. Treasury prices rise. This makes sense, since fiat money must exist to earn a yield, and the U.S. government will never voluntarily go bankrupt in dollars due to its ability to effortlessly print money. The real value of Treasury bonds can and does fall, but policymakers don’t care about the real value of all that junk fiat assets that are flooding the world.

The first few trading days after “Liberation Day” saw stocks fall and bond prices rise/yields fall. Then, something happened and bond prices fell in tandem with stocks. The 10-year Treasury yield had a back-and-forth swing of magnitude not seen since the early 1980s. The question is, why? The answer, or at least what policymakers think the answer is, is extremely important. Is there a structural problem with the market that must be fixed by the Fed and/or Treasury printing money in some form?

From Bianco Research, the bottom shows the abnormal degree of the 3-day change in the 30-year bond yield. The degree of change caused by the tariff panic 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 a good thing.

The RV Fund's Treasury basis trade position may be unwound, which is a problem. How big is this trade?

February 2022 is critical for the US Treasury market because US President Biden decided to freeze the Treasury bond holdings of Russia, the world's largest commodity producer. This actually shows that no matter who you are, property rights are no longer a right, but a privilege. Therefore, overseas demand continues to weaken, but RV funds fill this gap as marginal buyers of US Treasuries. The above chart clearly shows the increase in repo positions, which can be used as a proxy for the size of basis trading positions within the market.

Basis Trading Overview:

Treasury bond basis trading involves buying a spot bond and simultaneously selling a bond futures contract. The impact of margin at banks and exchanges is critical.The size of an RV fund's position is limited by the amount of cash required by the margin requirement. Margin requirements vary with market volatility and liquidity factors.

Bank Margin:

To obtain the cash needed to buy bonds, the fund enters into repurchase agreement (repo) transactions. Banks agree to pay a small fee and immediately advance cash to settle the bonds to be purchased as collateral. Banks will require a certain amount of cash margin to cover the repo.

The more volatile the bond price, the higher the margin required by the bank.

The less liquid the bond, the more margin the bank requires. Liquidity is always concentrated in certain tenors of the yield curve. For global markets, the 10-year is the most important and has the highest liquidity. When the latest 10-year Treasury bond is auctioned, it becomes the "on-the-run" 10-year bond. It is the most liquid bond. Then, over time, it moves further and further away from the liquidity center and is considered "off-the-run". Over time, new issues naturally become "off-the-run" and the amount of cash required to fund repo transactions increases while funds wait for the basis to collapse.

Essentially, during periods of higher market volatility, banks worry that if they need to liquidate a bond, the price will fall too quickly and liquidity will not be enough to absorb their market sell orders. Therefore, they increase their 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 market volatility.

The exchange is concerned with its ability to close out a position before the initial margin is fully exhausted. The faster prices move, the more difficult it is to ensure solvency; therefore, when market volatility increases, margin requirements will also increase.

Alleviating Fears:

The huge impact of Treasury basis trades on the market and how the major players are funded has always been a hot topic in the Treasury market. The Treasury Borrowing Advisory Committee (TBAC) has provided data in past Quarterly Refinancing Announcements (QRAs) that confirms the claim that the marginal buyers of Treasury bonds since 2022 have been RV hedge funds participating in such basis trades. Here is a link to a detailed paper submitted to the CFTC, based on data provided by TBAC from April 2024.

The chain of cyclical reflexive market events, amplified in terrifying fashion in each cycle, goes something like this:

1. If bond market volatility rises, RV hedge funds will need to deposit more cash with banks and exchanges.

2. At a certain point, these funds will not be able to afford the additional margin calls and must close their positions simultaneously. This means selling the spot bond and buying back the bond futures contracts.

3. Liquidity in the spot market decreases as market makers reduce the size of their bids for spreads to protect themselves from harmful one-way flows.

4. Market volatility increases further as liquidity and prices decline together.

Traders are well aware of this market phenomenon, and regulators themselves and their financial journalist goons have been sending warning signs about it. Therefore, as volatility in the bond market increases, traders rush to buy before they are forced to sell, which exacerbates downside volatility and causes the market to collapse faster.

If this is a known source of market stress, what policies can the US Treasury implement within its department to keep money (that is, leverage) flowing to these RV funds?

Treasury Bond Repurchases

A few years ago, the US Treasury launched a bond repurchase program. Many analysts look ahead and think about how this will fuel or encourage some money printing. I will lay out my theory on the impact of repurchases on the money supply. But first, let's understand how the program works.

The Treasury will issue new bonds and use the proceeds to buy back off-the-run bonds, which are less liquid. This will cause the value of off-the-run bonds to rise, possibly even above fair value, as the Treasury will be the largest buyer in an illiquid market. RV funds will see the basis between off-the-run bonds and bond futures contracts narrow.

Basis Trade = Long Cash Bonds + Short Bond Futures

Long cash bond prices will rise as off-the-run prices rise in anticipation of Treasury bond purchases.

Therefore, RV funds will lock in profits by selling off-the-run bonds, which are now more expensive, and closing out their short bond futures contracts. This frees up precious funds from banks and exchanges. Since RV funds are making money, they jump right into the basis trade at the next Treasury auction. As prices and liquidity rise, bond markets become less volatile. This reduces the fund's margin requirements and enables it to take larger positions. This is procyclical reflexivity at its best.

Knowing that the Treasury is providing more leverage to the financial system, the market will now relax. Bond prices rise; all is well.

Treasury Secretary Besset touted his new tool in interviews because the Treasury can theoretically do unlimited repo. The Treasury cannot just issue bonds without a spending bill approved by Congress. However, the essence of a repo is that the Treasury issues new debt to repay old debt, and the Treasury has already issued new debt to repay the principal of maturing bonds. Since the Treasury buys and sells bonds in the same name as a primary dealer bank, this transaction is cash flow neutral, so it does not require the Fed to borrow money to do the repo. Therefore, if reaching the repo level can alleviate market concerns about a collapse in the Treasury market and cause the market to accept lower yields on bonds that have not yet been issued, the Treasury will go all out to do repo. It can't stop, and it won't stop.

A note on Treasury supply

Besset knows that the debt ceiling will be raised sometime this year, and the government will continue to spend with increasing momentum. He also knows that Elon Musk, through his Department of Government Efficiency (DOGE), is not cutting spending fast enough for a variety of structural and legal reasons. Specifically, Musk’s estimates for spending cuts this year have fallen from an expected $1 trillion per year to a paltry $150 billion (at least given the sheer size of the deficit). This leads to an obvious conclusion: the deficit may actually widen, forcing Besset to issue more Treasury bonds.

As it stands, the FY25 deficit, which ends in March, is 22% higher than the FY24 deficit at the same point in the reporting year. Give Musk the benefit of the doubt — and I know some of you would rather burn your Tesla to the sounds of Grimes than believe it — he’s only been at it for two months. More worryingly, uncertainty among businesses about the magnitude and impact of tariffs, combined with a falling stock market, will lead to a sharp drop in tax revenues. This would point to a structural reason why the deficit will continue to widen even if DOGE succeeds in cutting more government spending.

Besset is worried deep down that he will have to revise upward his borrowing expectations for the rest of the year due to these factors. With the coming flood of Treasury supply approaching, market participants will demand significantly higher yields. Besset needs the RV Fund to step up, use maximum leverage, and buy out the bond market completely. Therefore, repo is imperative.

The positive impact of repo on USD liquidity is not as direct as central bank money printing. Repo is budget and supply neutral, so the Treasury can do it in unlimited quantities to create huge RV purchasing power. Ultimately, this allows the government to finance itself at affordable rates. The more debt is issued, and this debt is purchased not with private savings but with leveraged funds created through the banking system, the greater the growth in the quantity of money. Then we know that when the amount of fiat money increases, the only asset we want to own is Bitcoin. Go for it!

Obviously, this is not an unlimited source of USD liquidity. There is a limited amount of unissued Treasury bonds available for purchase. However, repo is a tool that can help Besset mitigate market volatility in the short term and finance the government at an affordable level. That’s why the MOVE index is falling. As the Treasury market stabilizes, so too are fears that the whole system is collapsing.

Same scenario

I liken this trading strategy to the third quarter of 2022. In the third quarter of 2022, a “decent” white boy like Sam Bankman-Fried (SBF) is broke; the Fed is still raising rates, bond prices are falling, and yields are rising. Yellen needs to find a way to stimulate the market so that she can open its throat with a red-soled stiletto and excrete bonds without inducing a gag reflex. In short, as it is now—with increased market volatility due to a shift in the global monetary system—it’s a bad time to increase bond issuance.

RRP Balance (white) vs. Bitcoin (gold)

Just like today, but for different reasons, Yellen couldn’t count on the Fed to ease monetary policy because Powell was on his Paul Volcker-inspired sideshow Prohibition tour. Yellen, or some brilliant adviser, correctly deduced that the dead money in the RRP (reverse repo) held by money market funds could be attracted to the leveraged financial system by issuing more Treasuries, which these funds were happy to hold because the yields were slightly higher than RRP. This allows her to inject $2.5 trillion of liquidity into the market between the third quarter of 2022 and early 2025. During this period, the price of Bitcoin has increased nearly 6 times.

This sounds like a pretty bullish setup, but people are panicking. They know that high tariffs and the Chi-Merica divorce are bad for stock prices. They think Bitcoin is just a high-beta version of the Nasdaq 100. They are bearish and don't think a harmless-sounding buyback program can increase future dollar liquidity. They sit on the sidelines and wait for Powell to ease policy. He can't just ease policy or implement quantitative easing like the successive Fed chairmen from 2008 to 2019 did. Times have changed, and now the Treasury has a heavier burden of printing money. If Powell really cared about inflation and the long-term strength of the dollar, he would eliminate the impact of the actions taken by the Treasury under Yellen and now Bessant. But he didn't do it then, and he won't do it now; he'll be fussing in the "turtle" chair, being manipulated.

Just like in the third quarter of 2022, people think that Bitcoin could fall below $10,000 after hitting a cycle low around $15,000 due to a combination of adverse market factors. Now some believe that the price of Bitcoin will fall below $74,500 and fall below $60,000, and the bull market is over. Yellen and Bessant are no joke. They will ensure that the government is funded at affordable rates and suppress volatility in the bond market. Yellen is issuing more short-term than long-term Treasuries, injecting limited RRP liquidity into the system; Bessant will buy back old debt by issuing new debt and maximize the ability of the RV fund to absorb the new bond supply. Neither of these is what most investors know and recognize as quantitative easing. So they turn a blind eye and have to chase Bitcoin once it confirms a breakout.

Verification

For buybacks to be a net stimulus, the deficit must continue to rise. On May 1, we will get a glimpse of the upcoming borrowing plans and how they compare to previous estimates through the Treasury's Quarterly Refunding Announcement (QRA). If Bessant has to borrow more or is expected to borrow more, it means that tax revenues are expected to fall; therefore, this will lead to a larger deficit if spending remains the same.

Then, in mid-May, we will get the official deficit or surplus data for April from the Treasury Department, which contains the actual data on tax revenues collected on April 15th. We can compare the year-over-year change in FY25 to see if the deficit is widening. If the deficit is growing, bond issuance will increase, and Bessant must do everything he can to ensure that risk-averse funds can increase their basis trade positions.

Trading Strategy

Trump skied down a steep slope and suddenly dropped, setting off an avalanche. Now we finally know the amount of pain or volatility the Trump administration can endure before easing any policy implementation that the market believes will negatively impact the cornerstone of the fiat financial system (MOVE index). This will trigger a policy response, the effect of which will be to increase the supply of U.S. fiat dollars available to purchase U.S. Treasuries.

If increases in the frequency and size of repo are not enough to calm the markets, then the Fed will eventually find a way to ease policy. They have already said they will. Most importantly, they lowered the rate on quantitative tightening (QT) at their most recent meeting in March, which is positive for USD liquidity on a forward-looking basis. However, the Fed could do more than QE. Here is a short list of procedural policies that are not QE but would enhance the market’s ability to absorb new Treasury issuance; one of which is likely to be announced at the May 6-7 Fed meeting:

• Exempt banks from the supplementary leverage ratio (SLR) requirement for Treasury bonds. This allows banks to use unlimited leverage to buy Treasury bonds.

• Implement a “QT twist” where funds raised from maturing mortgage-backed securities (MBS) are reinvested in newly issued Treasury bonds. The size of the Fed’s balance sheet remains unchanged, but this would put marginal buying pressure on the Treasury market of $35 billion per month for several years until all MBS stocks mature.

The next time Trump hits the tariff button—which he will do to ensure that countries respect his authority—he will be able to demand more concessions, and Bitcoin will not be hammered as some stocks have been. Bitcoin knows that deflationary policies cannot be sustained for long given the current and future insane levels of debt required for the dirty financial system to function.

The collapse of the Mt. Sharpe World ski resort set off a secondary market avalanche that could have quickly escalated to level five, the highest level. But Team Trump responded quickly, changed course, and pushed the empire to the other extreme. The foundation of the avalanche was reinforced with the driest and wettest "pow pow" solidified by crystallized dollar bills provided by U.S. Treasury repurchases. It's time to transition from slogging up the mountain with a backpack full of uncertainty to jumping off the powder pillow and cheering how high Bitcoin will fly.

As you can see, I am very bullish on Bitcoin. At Maelstrom, we have maximized our cryptocurrency positions. Right now, everything revolves around buying and selling different cryptocurrencies to accumulate Bitcoin. During the downturn when Bitcoin price fell from $110,000 to $74,500, the largest buying volume was in Bitcoin. Bitcoin will continue to lead the market as it is a direct beneficiary of more USD circulation from future monetary liquidity injections to mitigate the impact of US-China decoupling. Now that the international community considers Trump a lunatic who wields the weapon of tariffs in a crude manner, any investor holding US stocks and bonds is looking for something with anti-establishment value. Physically, that's gold. Digitally, that's Bitcoin.

Gold has never been seen as a high-beta version of US tech stocks; therefore, it has performed well as the oldest anti-establishment financial hedge as the overall market crashes. Bitcoin will break away from its association with US tech stocks and rejoin gold's "only up, no down" bandwagon.

What about altcoins?

Once Bitcoin breaks above its all-time high of $110,000, it will likely surge higher, further cementing its dominance. Maybe it won't go to $200,000. Then, Bitcoin starts rotating into shitcoins. Altcoins rise (AltSzn: Chikun), come on!

Besides the shiny new shitcoin metadata, the best performing tokens are the ones that have a unique combination of both earning profits and returning profits to stakers. There are only a handful of such projects. Maelstrom has been working hard to accumulate positions in certain qualifying tokens and is not done buying these gems yet. They are gems because they got hammered like all the other shitcoins in the recent sell-off, but unlike 99% of the shit projects, these gems actually have paying customers. Convincing the market to give your project another chance after launching it on a CEX in Down Only mode is impossible due to the sheer volume of tokens. Shitcoin divers want higher staking APYs where the rewards come from actual profits because those cash flows are sustainable. To promote our product, I will be writing a full article on some of these projects and why we think their cash flows will continue to grow in the near future. Until then, back up the trucks and buy everything!