Ai Funding Needs Arent Driving Yields Higher

AI FUNDING NEEDS AREN’T DRIVING YIELDS HIGHER Daniel von Ahlen / Robert Taylor

◼ Macro Drivers: Chinese credit demand remains extremely depressed. ◼ Multi Asset: History favours staying invested in equities through the US midterms. ◼ Fixed Income: US HY fundamentals are still resilient. ◼ Currencies: KRW is well placed to continue rallying. ◼ Equities: Equity market breadth is deteriorating rapidly. ◼ Alternatives: Risk premia and logistical challenges are keeping crude oil prices sticky.

Chart of the Month US yield curve remains rather flat while swap spreads haven’t moved much

Sources: Macrobond, GlobalData TS Lombard.

A popular narrative in bond markets these days is that the immense funding needs of AI capex investment are pushing up real yields. However, we disagree with that assessment – for two reasons. First, the AI capex story has been around for a long time now. And second, it does not pass the smell test, as the US yield curve remains very flat and swap spreads haven’t budged much either.

SUMMARY – KEY POINTS Macro Drivers

▪ The recent revisions to the US national accounts suggest the consumer is in better shape than previously thought. ▪ Chinese credit demand remains extremely depressed.

Multi Asset ▪ History favours staying invested through the US midterm elections: since 1954 stocks have risen in the 12 months following 17 of the 18 midterms. ▪ As regards agricultural commodities, El Niño appears to be largely priced in; most softs are coming off their highs and cheaper fertilizer is partly offsetting the rise.

Fixed Income ▪ The sharp repricing of the Fed path will likely prevent US HY spreads from falling well below 300bp again. ▪ The surge in real yield is mostly a function of Fed hawkishness – in our view, surging AI funding needs aren’t the driver.

Currencies ▪ The KRW bull run has still further to go as macro and market drivers remain supportive. ▪ Even though the oil shock is hurting the Korean economy, Korea's terms of trade have, in fact, improved, unlike those of its peers.

▪ Tech outperformance is accelerating as earnings keep growing strongly. ▪ Equity market breadth is deteriorating rapidly. ▪ Valuations of European bank shares should recover once Europe’s fiscal jitters stabilize.

Alternatives ▪ Managed futures and commodities have soared this year amid the slump in bonds. ▪ While the flow picture for crude oil in the Gulf has improved, geopolitical risk and logistical challenges are keeping prices elevated.

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