Well, that escalated quickly.
Bond yields across the globe spiked to multi-decade highs on Tuesday. The moves were particularly pronounced in the US, UK, and Japan — places running massive budget deficits.
Add Iran-war inflation and a less predictable Fed to the mix and you have the cocktail for a bond tantrum. The moves ultimately sent a gauge of global yields to its highest level since 2008.
But there’s a new force crashing the party and putting in a claim for capital — a disruptive force investors are already quite familiar with: AI. Reshaping the stock market wasn’t enough. Now it’s coming for fixed income.
AI titans have been increasingly tapping debt markets to fuel their enormous spending ambitions. They need money for data centers, chips, and power deals.
Those bonds are competing with government debt for the same pool of capital — from pensions, insurers, and foreign investors. And they’re doing it not just in dollars, but in currencies such as sterling, Canadian dollars, and Swiss francs.
The effect is most visible in the US, where private foreign investors bought a net $390 billion of corporate bonds over the past year, outpacing the $329 billion they bought in Treasury notes and bonds, according to Yardeni Research. That Treasury figure is down more than 40% from a year earlier.
That doesn’t mean investors are abandoning government debt. But it does mean the US government and its global counterparts suddenly have to compete with the AI boom for money.
Part of the reason AI debt can be so competitive is that it’s so high-quality. That leads to an inversion of the traditional relationship between corporate bonds and government debt. Rather than Treasurys crowding out company bonds, the opposite is happening. In this case, Treasury yields rise to stay relevant for investors.
But in an ironic twist, the higher yields that AI debt issuance is helping drive can both raise financing costs for projects and act as a drag on stock prices.
That push-and-pull is already starting to show up in the market. Big Tech’s debt is still highly prized, but investors have started to demand better terms to buy it. Alphabet’s $25 billion bond offering last month is a recent example, pricing at a higher yield than the company had previously paid.
The AI race may have made stocks feel like the center of the investing universe. But when bond yields rise, the effects eventually land much closer to home: pricier mortgages, more expensive car loans, and higher borrowing costs for the businesses people work for and shop from.
As governments and AI titans continue to line up to borrow, those costs are only getting steeper.
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