No. of Recommendations: 8
Most METARs are focused on the stock market. But the bond market is larger than the stock market. Debt can pull the system into a financial crisis in a way that a popping stock bubble can’t.
Those of us who remember the popping of the dot-com stock bubble may remember that the lenders who financed the build-out of the internet got stiffed.
Bondholders lost billions of dollars, but the exact total is difficult to pinpoint; however, estimates suggest losses in the trillions for the broader market as the bubble popped.
Many telecommunications companies took on too much debt to build out networks and overestimated demand, leading to widespread bankruptcies and defaults that wiped out bondholders. For example, by 2002, investors had recovered only slightly over 20% of their investments in the telecom sector.
The bond market in today’s AI build-out has an eerie similarity.
https://www.wsj.com/finance/investing/flood-of-ai-...
Flood of AI Bonds Adds to Pressure on Markets
Prices of newly issued bonds have slid, adding to investors’ anxieties about stock valuations
By Sam Goldfarb, The Wall Street Journal
Wall Street is straining to absorb a flood of new bonds from tech companies funding their artificial intelligence investments, adding to the recent pressure in markets. …
[snip huge numbers to build data centers]
Stock investors, already nervous about the sky-high valuations of AI businesses, have taken note of the weakness in the bond market. Meanwhile, the cost of insuring those bonds using credit-default swaps also has climbed, with negative sentiments from different groups of investors feeding into each other…. [end quote]
This flood of bond issuance is happening at the same time that the government deficits are rising. Of course, the credit rating of the government is much higher than the corporate debt (some are solid while others are junk).
The spreads of investment grade and junk bonds are rising. This will make these projects more expensive to finance (and more likely to default later).
fred.stlouisfed.org
ICE BofA BBB US Corporate Index Option-Adjusted Spread
https://fred.stlouisfed.org/series/BAMLC0A4CBBBICE BofA CCC & Lower US High Yield Index Option-Adjusted Spread
https://fred.stlouisfed.org/series/BAMLH0A3HYCWendy
