In an interview with CNBC, Chris White, CEO of BondCliQ and ViableMkts, said that as bond supply and default risks grow, investors are starting to demand higher yields.
- The fixed-income expert said bond markets react over weeks and months, unlike the day-to-day reactions of stock markets.
- As fresh bond issues from hyperscalers enter the market, he raised concerns about higher yields needed to tap the market again.
- The fixed-income expert also noted that as bond oversupply begins, it would also affect the U.S. government’s ability to raise capital.
Amid a volatile environment for long-dated U.S. Treasuries, Chris White, CEO of BondCliQ and ViableMkts, believes bond investors are starting to doubt the long-term prospects of many large artificial intelligence hyperscalers.
In an interview with CNBC, White said the major difference between the stock market and the bond market is that the latter reacts over weeks and months, as compared to the day-to-day reactions of stock markets.
Why White Thinks Bond Markets Indicate AI Doubts
“I think the numbers are pretty clear when you look at CoreWeave, when you look at Oracle, and when you look at the other AI hyperscalers that bond investors have been starting to doubt some of the stories regarding the long-term prospects of a lot of these AI hyperscalers,” White said.
He said that as default risks grow, investors are starting to demand higher yields on bonds to compensate for greater risk. He pointed out that some of the “pretty big unknown risks” include geopolitical uncertainty.
Speaking specifically about Oracle Corp. (ORCL) and CoreWeave (CRWV), White said that while their outstanding debt was about 5% of the total $258 billion outstanding, their short maturity range is far more concerning.
Oracle raised $25 billion through an eight-part investment-grade senior unsecured bond offering in February this year. Meanwhile, CoreWeave raised $3.7 billion through convertible notes in September, following high-yield debt issuances earlier in the year.
“They’re going to have to refinance this debt in the next five to seven years. And that then makes them a lot more sensitive to, I would say, the shorter-term interest rate conditions,” White said.
As fresh bond issues from hyperscalers enter the market, he said the worry is that if the hyperscalers need to tap the market again, investors are “going to demand a yield premium to take on the additional risk that these bonds sell off very quickly after they’re being issued.”
Investors Are Demanding Yield Premium Across The Spectrum
White added that if Microsoft, the only triple-A-rated AI hyperscaler, taps the bond market at wide spreads, it would become the benchmark for all other AI hyperscalers.
“So if Microsoft wanted to back up their yields a little bit and say, hey, we’re going to give everyone a sweetheart deal, people are going to expect all the other AI hyperscalers to follow suit,” he said.
The fixed-income expert also noted that as bond oversupply begins in the market, it would also affect the U.S. government’s ability to raise capital.
Long-dated U.S. Treasuries are already trading near multi-decade high yields. At the time of writing, yields on 10-year U.S. Treasuries and 30-year Treasuries were trading above 5%.
“We’re obviously hearing comments coming out of the White House that they’re concerned about long-term yields. There have been direct bond-buying programs. I think this has a lot to do with the oversupply we’re seeing from AI hyperscalers,” he said.
US Bond Market Performance
The iShares 20+ Year Treasury Bond ETF (TLT) was trading about 1% higher at the time of writing amid ‘neutral’ sentiment. Meanwhile, the iShares 10-20 Year Treasury Bond ETF (TLH) was down about 0.05% overnight amid ‘neutral’ sentiment.
One user said, “There’s a rush to safety in bonds. Look at the yields sell off as equity is selling off. As yields fall it should have made the markets rally. It isn’t. That is telling you money is rotating out of equity and into bonds. Equity is now seen as too risky and bonds is seen as a good place to put your money.”
Another user said, “How deep in a recession are we if the AI trade stops? Asking for the non-bond holders out there. Get some bonds!”
Meanwhile, the iShares Core U.S. Aggregate Bond ETF (AGG), which tracks the performance of the broad U.S. investment-grade bond market, was up 0.47% overnight amid ‘bearish’ sentiment.
The Vanguard Total Bond Market ETF (BND), which gives investors exposure to the investment-grade U.S. dollar-denominated bonds, was down 0.13% amid ‘neutral’ sentiment.
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