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- 🧨 What Happens When the Base Layer Breaks? 🧱
🧨 What Happens When the Base Layer Breaks? 🧱
💥“It Is Going to Happen.” — Jamie Dimon
Luke Lovett
June 02, 2025
That’s what JPMorgan’s CEO just said about the bond market cracking — and he didn’t say it lightly.
He was referring to a rupture in what has long been considered the base layer of the entire global financial system: U.S. sovereign debt.
But what happens when that base begins to malfunction?
We start to see capital gravitate back toward the former base layer — gold — which keeps printing new all-time highs. Not because of hype, but because of quiet institutional rotation out of paper and into permanence.
⚠️ Key Signals Recap
Signal | Current Level | Risk Tier |
|---|---|---|
10Y Swap Spread | –27.4bps | 🔴 Critical (< –20bps) |
10Y Treasury Yield | 4.397% | 🟠 High (>4.25%, ⚠️ Critical >5.00%) |
SOFR–OIS 3Y Spread | +25bps | 🟠 Caution (>20bps, 🔴 Critical >35bps) |
Japan 10Y Yield | 1.497% | 🟠 Caution (>1.25%, 🔴 Critical >1.75%) |
USD/JPY | 144.06 | 🟠 Danger Zone below 140 |
📉 The Cracks Are Widening
Historically, Fed rate cuts pull long-dated Treasury yields lower.
But from August 2024 to January 2025, the Effective Federal Funds Rate (EFFR) fell from 5.33% to 4.33%, while the 10Y Treasury yield rose from 4.056% to 4.561%.
That’s a full percentage point in cuts… met with a market that shrugged.
Now, in June 2025, the 10Y yield is still at 4.397%, and the 10Y swap spread is an alarming –27.4bps — a deeply negative reading that shows private markets favor risk over government debt. That’s not just inverted — it’s upside-down confidence.
When the “risk-free” benchmark becomes the risk — the system is rejecting its own foundation.
🗾 Why Japan Matters — And Always Has
The Japan 10Y yield is now at 1.497%, quietly but persistently rising.
Japan remains the largest foreign holder of U.S. Treasuries. When Japanese yields climb, it tempts capital back home — pressuring the dollar and spooking global bond flows.
Compounding the problem, USD/JPY is hovering at 144.06. If it drops below 140, it could trigger a yen carry trade unwind, causing:
A rush to cover short yen positions
Forced liquidations of U.S. Treasuries
A cascading bond sell-off across global portfolios
🩺 No Liquidity Firewall Left
The Reverse Repo Facility (RRP) bounced back up to $315.657B — but this is still the mid-to-upper edge of the caution zone, far from the $2.2T peak.
It’s not a buffer. It’s a stall — and history says the bleeding resumes.
In February 2025, RRP dropped below $100B — and markets sold off sharply. A renewed drawdown from here would strip the last layer of institutional liquidity between volatility and freefall.
🧠 For Short-Term Traders: Why This Matters
This isn’t about panic — it’s about prepared perception.
If you’re trading or managing short-term exposure, here’s what matters now:
10Y > 5.00% = Sell pressure on equities accelerates
Swap spread < –20bps = Dealers rejecting Treasury collateral
USD/JPY < 140 = Carry trade unwind begins
SOFR–OIS > 25–30bps = Future liquidity divergence priced in
RRP < $200B = Final liquidity firewall eroding again
None of these are "predictions." They're pressure points.
And the more they cluster, the faster the move when something snaps.
🔮 What Might Happen Next?
Scenario | Probability | Narrative |
|---|---|---|
🟢 Suspended Dysfunction | 50–55% | Yields grind sideways. Vol explodes elsewhere. Quiet capital rotation continues as equities levitate. |
🟠 Collateral Stress Repricing | 15–25% | Swap spreads stay negative, USD/JPY breaches 140, RRP drains. Mild selloff across risk. |
🔴 Liquidity Crunch + Margin Call Rotation | 10–15% | 10Y surges >5.00%, vol spikes, equities gap lower. Commodities whipsaw. Gold dips, then surges. |
⚫ Trust Fracture Catalyst | 3–5% | Unexpected dealer, sovereign, or FX stress causes major revaluation. Paper assets deflate. Intrinsic assets explode. |
💡 Final Reflection: Intrinsic Value Doesn’t Panic
When swap spreads scream, bond yields climb despite cuts, and the yen teeters on an edge — you’re not in a normal market.
You’re in a market where belief in paper is breaking.
And belief is what holds fiat together.
That’s why gold keeps making all-time highs — not from euphoria, but from evacuation.
We are witnessing a revaluation — not of prices, but of trust.
🔑 Watch the foundation.
🧲 Follow the rotation.
⛓️ Don’t be shocked if paper fractures where you least expect it.
Because as Jamie Dimon just said —
“It is going to happen.”
Thank you for reading. This report is free for now. That won’t always be the case. Subscribe now to stay ahead of the curve.
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Luke Lovett
📲 Cell: 704.497.7324
🌐 Undervalued Assets | Sovereign Signal
📧 Email: [email protected]
🔐 Legal Disclaimer 🔐
The content provided herein is for informational and educational purposes only and should not be construed as financial, investment, legal, or tax advice. I am not a licensed financial advisor, investment professional, or attorney. The views expressed are solely those of the author and are not intended to be relied upon for making investment decisions.
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I do not hold funds, process transactions, or provide personalized investment advice.
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