Analysts and economist are, broadly speaking, offering up four separate reasons for the continued rise in developed market, and in particular, US bond yields. A resurgence in inflation due to the negative supply shock in global energy markets as a result of the US-Iran war, loose fiscal policy with little or no credible plan for any near-term consolidation, a reflection of improving underlying growth and rising productivity—linked to the AI investment boom—lifting the real neutral rate for “the right” reasons, and more specifically in the context of AI, rapidly accelerating AI debt issuance “crowding out” government debt issuance, lifting the cost of capital for the sovereign.
The idea that AI debt issuance is now a key driver of rising bond yields via a “crowding out” effect has captured a lot of attention in recent weeks with key Wall Street analysts and publications offering evidence to support the claim. The FT’s Toby Nangle, however, is not so sure, and in a recent FT Alphaville piece he sets out to rebut the claim.
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