The Fed’s AI Puzzle: Will High Rates Slow the Boom?

For months, a common view of the artificial-intelligence boom has been that it is propping up the U.S. economy and it is too big and too flush with cash to care about interest rates. Federal Reserve Chairman Kevin Warsh said Wednesday he wasn’t so sure about either assumption. (…)

“There was a narrative for quite a while, maybe even in this room over the course of the last several press conferences,” that tighter monetary policy is “not going to have any effect on AI because the returns that investors are expecting are so different,” Warsh said. “I was skeptical of that view. Interest rates get in the cracks. Interest rates affect, directly or indirectly, almost everything.”

And since the Fed raised rates last month, there was evidence investors had become more discriminating about their investments, Warsh said, pointing to how borrowing costs for some riskier companies have jumped. (…)

Warsh’s remarks on AI bear on the question of how high rates ultimately need to go, and the answer may depend on how much the technology sector responds to borrowing costs. The case that it is highly insensitive to modest increases in rates rests on the assumption that firms expect returns large enough to dwarf the cost of money, and they see the contest as winner-take-all. “You want to be one of the winners, and that means you’ve got to get there first,” said William English, a former Fed economist now at the Yale School of Management.

If the boom shrugs off higher borrowing costs, the Fed would have to throttle housing, commercial real estate, small businesses, low- to middle-income consumers and other rate-sensitive sectors that weren’t big sources of inflation to begin with. (…)

“The idea that there’s no interest-rate sensitivity from anything related to AI, to me, is very extreme,” said Marc Giannoni, chief U.S. economist at Barclays. The largest tech companies may not have to borrow to pay for their spending, but for data-center operators and other firms building alongside them that do, “interest rates on their debt is a big factor,” he said.

The Fed’s challenge is that the boom as a whole can look unfazed while strains build at the edges. As more of the build-out is financed with debt, higher rates reach it through credit markets, hitting the weakest borrowers first and the cash-rich giants last. Each increase might seem to do little until financial conditions suddenly crack. (…)

Warsh’s second position cuts the other way. “It is convenient to say that the strength of the economy is all about this new technology wave,” he said. In fact, business investment is “not just strong, but it is broadening.”

Warsh was quick to note that he doesn’t see strong growth as something that would necessarily push up inflation, which would justify higher interest rates.

“He’s basically saying, ‘We need to do more, but it may not be all that much more,’ ” said Reinhart.

Still, Reinhart thinks the risks lean toward the Fed having to do more than it thinks in the short run, in part because energy and commodity prices appear to be settling in at a higher level. “Other prices are going to have to catch up to that, so they may find out that inflation is more durable, in which case, they get impatient in 2027 and have to tighten more,” he said.

Richard Bernstein at Janus Henderson last week built a case suggesting that secular inflation may be what’s in store after 30 years of disinflation.

His 2 main supporting charts:

• The US is now importing inflation: core import prices are rising faster than core CPI.

• Businesses are generally raising prices at a pace even higher than pre-NAFTA and pre-globalization.

This Yardeni chart shows that US businesses are raising prices because cost inflation is very high:

The October Flash PMI confirms September’s:

• US economic growth is broadening and accelerating to “booming conditions”.
• Employment growth is also accelerating, “at the fastest rate since June 2022”.
  The Atlanta Fed composition-adjusted wage tracker pinned the low point in overall wage growth at 3.5% last April. It was 3.9% in August. Wage growth for job switchers also troughed in April at 3.7%. It jumped to 4.7% in August.

• Corporate costs are also surging due to “material shortages, low stock levels, overloaded suppliers, labour shortages, rising back orders and shipping or import delays”.
• Strong demand allows businesses to broadly boost selling prices.

From the Atlanta Fed survey of 1500 senior finance and managerial businesspeople Oct. 12-23:

BTW: General Motors Co. last week said that worsening inflation will add about $400 million in additional expenses this year, citing record copper prices and key steel products at a four-year high. Ford said commodity inflation will be a nearly $2.5 billion headwind in 2026, up from its previous forecast for just above $2 billion. (Bloomberg)

As John Authers observed,

In September, when the Fed raised rates, economic activity was increasing at a “solid” pace. Now, it’s growing at a “strong” pace — so the Fed thinks the economy is accelerating further, despite that hike. (…)

Once Warsh’s press conference — which you can see here — reached its Q&A section, Colby Smith of the New York Times started by asking exactly that: “Why not just raise rates today?”

Warsh said that he’d expected the question. His response lasted three minutes and 16 seconds. He never came close to answering it. Among the lines he offered during his ramble:

• “We’ve doubled down on the 2% target.” [It’s been in place informally since 1996 and formally since 2012.]
• “We’ve laid out our framework in Jackson Hole.” [That’s what central bankers do when they’re in Wyoming.]
• “We didn’t just talk about acting. In September we acted.” [We knew that — the question was why they didn’t act again in October.]
• “The period right in front of us is information-rich.” [More so than other periods? Or is this code for knowing the midterm results by December?]
• “We interrogated reality.” [Good, but it would be alarming if the Fed didn’t do that.]

(…) his last response made perhaps his most interesting statement: “The goal isn’t to throw sand in the the gears of the economy and throw people out of work.” Again, it would have been very big news if he had said the opposite. But many took his emphasis and choice of words as a “tell” that this Fed isn’t prepared to risk forcing a recession. (…)

I think that Ed Yardeni highlighted the most interesting part: “Warsh disputed that robust growth necessarily implies overheating: “That isn’t the judgment of most of my colleagues.” Improving productivity, much of it predating recent AI advances, may have raised potential growth without fueling inflation.”

Ed adds:

We agree that September’s hike “removed a dose of accommodation,” but believe another 50bps is needed to remove the rest. The Fed doesn’t need to throw sand in the economy’s gears. It just needs to take its foot off the accelerator. We wouldn’t rule out a 50bps hike in December.

Goldman: “We continue to expect a second and final hike in December. A third hike in March is also possible if inflation comes in higher than we expect.”

Authers continues:

Overall market reaction was tame, but a rise in market-based inflation expectations, which had been under control, suggest that Fed credibility was coming into question:

The last two spikes in expectations can be attributed to policy own-goals by the administration; this one looks like the Fed’s fault.

As for the stock market, the juxtaposition between the reaction to Warsh’s words and the results from Alphabet Inc. and Microsoft Corp. tended to confirm that these days, hyperscalers are of macroeconomic importance:

Speaking of GM above:

Yesterday, General Motors announced plans to decamp from the venerable bourse after a 115-year stint, shifting its listing to Nasdaq as of Nov. 17.  “GM’s customer-focused, technology-driven strategy is creating value for our stockholders, making Nasdaq a natural home for our listing as we grow,” CFO Paul Jacobson stated. 

Instructively, the press release noted that the move renders GM eligible for inclusion in the Nasdaq 100 Index.

Though the legacy automaker doesn’t exactly look the part, with shares changing hands at six times forward earnings versus 26 times for the tech-centric gauge, and three-year projected earnings growth of only 18% versus 52% for the median NDX member (hat tip to Bloomberg’s Liam Denning), that prospect helped put some spring into GM investors’ step. Shares advanced by nearly 6% on Tuesday, good for their strongest daily showing in an even nine months. (ADG)

That should make every tech investor happy to know that buying NDX shares provides exposure to GM.

BoC Policy Monitor: Up, up and away

(…) Supporting the move was “higher and more persistent” inflation and risk management considerations aimed at preventing the spread of energy prices more broadly. Further, the economy was judged to be on firmer footing and proving more resilient, consistent with earlier comments from the Governor.

While there was an acknowledgement that the economy could slow in Q4 due to tariffs, this doesn’t even dent the GDP growth outlook which was revised up at least two ticks in 2026, 2027 and 2028.

But most striking was the Bank’s fundamental rethink on the inflation outlook, underscored by a 1.1%-pt upward revision to their 2027 CPI projection. To be clear, price stability is not expected to be achieved anytime soon. (…) Macklem and Rogers indicated as much when they noted there was a strong consensus around the decision.

With the tightening cycle underway, the attention turns to the next meeting on December 9th. The communique fails to explicitly tee up a follow-on move and even suggests that they would “proceed carefully”. But judging by their updated forecasts and fundamental rethink on inflation, it’s hard to make the case to go slowly.

Ultimately, incoming data and the evolving balance of risks will guide the Bank, but baring a de-escalation in the Middle East and/or a material escalation in the Canada-US trade war, we’d lean toward them hiking again in December.

And as we explored recently, the Bank has a strong tendency to begin tightening cycles with consecutives hikes. (…)

• How Canada is Decoupling From the US

 

 

 

American tariffs on Canada were particularly counterproductive because so many Canadian goods are intermediate inputs for American factories, and Canada is one of the few countries where the US actually ran a surplus in manufactured goods. The damage on the American side of the border has been larger, even if Canada’s situation is more existential because its economy is proportionally smaller.

CAPITAL IS CAPITAL

Wall Street’s AI Debt Machine Is Starting to Choke on Supply

A new anxiety is gripping Wall Street as it bankrolls the vast network of data centers and chips behind the artificial intelligence boom: Early signs suggest that the credit market is approaching the limits of how much more debt it can absorb.

One after another, yields are soaring into the double digits on bonds and loans funding the AI infrastructure buildout. Bankers are finding it more difficult to offload risk to insurers and other investors. Elon Musk himself warned the other day that hundreds of so-called neoclouds risk going under as firms get cut off from fresh financing. (…)

The concern is that, with trillions more in debt needed over the coming years, there appears to be a growing disconnect between what Silicon Valley’s top executives believe can be raised, what financiers say they can deliver, and what money managers are willing to take down.

“When you have such a large quantum of debt coming, at some point the challenge could be less about finding an investment-grade backstop, and more about finding the actual buyers willing to absorb more of the risk coming from the same handful of investment-grade backstop providers,” said Citadel analyst Tucker Roberts.

In conversations with more than 30 bankers, money managers, private equity executives and others involved in recent and current data center financing talks, all acknowledged that raising cash has become significantly more difficult than it was just months ago.

A key reason is the growing concern among investors over cancellation rights and other contractual off-ramps that could leave them exposed if a major customer walks away. (…)

Another major challenge has been offloading risk to free up capacity for new deals.

The head of technology, media and telecom lending at a large European bank said the firm is approaching the limit of what it can lend to the sector given its already sizable exposure. Selling the debt or transferring the risk can take five months, limiting its ability to recycle capital into new financing, the person said, asking not to be identified discussing internal matters.

Some insurers, which often take on a share of the credit risk on such loans, were indicating months ago that they were nearing or had already reached their limits on data center exposure, according to a survey from Willis Towers Watson.

Data center operators are also being hurt by higher interest rates, particularly in the asset-backed securities market, where rental income is often locked in under long-term leases.

“At the beginning of 2026, the highest-rated data center bonds offered yields below 5%. Today similar bonds are yielding closer to 7%, and that increase matters enormously for companies trying to finance multibillion-dollar facilities,” Morgan Stanley ABS strategist Carolyn Campbell said in a podcast earlier this month. “When borrowing costs approach 8%, issuing these bonds becomes significantly more challenging.” (…)

Oaktree Co-Chief Executive Officer Armen Panossian said the firm has become “very, very cautious” about the structure and quality of assets backing data-center deals, citing risks from technological change and construction delays to permitting hurdles and access to power.

“We’re seeing in the last several weeks a widening of those spreads that indicates that the credit markets are becoming either full, saturated of the loans that are out there, or concerned about some of these factors that are lurking in the background,” Panossian said in a recent client webcast. (…)

At least 18 data-center financings across the junk-bond and leveraged loan markets now carry double-digit yields, according to data compiled by Bloomberg. Even new deals are feeling the strain. JPMorgan Chase & Co. and Goldman Sachs Group Inc. had to offer steeper discounts and higher interest payments to drum up demand for neocloud Volta Infrastructure Holdings Ltd.’s $5 billion syndicated loan, pushing its yield above 11%.

Credit investors are starting to recognize that much of the debt neoclouds still need to raise may ultimately depend on backing from tech giants already burdened with their own massive financing needs, Citadel’s Roberts said. Whether via explicit guarantees, long-term contracts or simply the expectation that they’ll step in if projects run into trouble, chipmakers and hyperscalers could find themselves shouldering an increasing share of the risk, he added. (…)

The pressure is showing up in their borrowing costs, too. The average yield on bonds in the Bloomberg Investment Grade Technology Index has surged to about 6%, about 1.4 percentage points higher than a year ago.

“The banks and companies raising capital have been relatively transparent that they do not care about pricing it wider and marking down paper you’ve bought,” said John Yovanovic, co-head of leveraged finance at MetLife Investment Management. “So you’re being asked to finance a deal that has likelihood of being less than par in the near term, even when it has attractive long returns. Who wants to step in front of that?” (…)

KKR & Co. is steering clear of data centers in remote locations amid concerns that the facilities could be difficult to repurpose once their leases expire, according to a person familiar with the matter, while Carlyle Group Inc. has passed on a number of recent deals as it emphasizes portfolio diversification and selectivity.

“People are just getting more conscious of their concentration risk in the sector,” said Felicity Juckes at TwentyFour Asset Management. Investors “are going to be increasingly picky.”

Washington, we have a problem!

Vance Reaches Out to Iranian Hard-Liner in Bid to Restart Peace Talks

Vance sent a letter to Mohsen Rezaei, the secretary of Iran’s top security body, the Supreme National Security Council, and previously Iran’s longest-serving commander of the Islamic Revolutionary Guard Corps, according to the people. (…)

Vance is testing whether Tehran and Washington could find enough common ground to persuade Trump not to give a final order for a short, intense attack on Iran in the coming weeks. (…)

Vance’s letter and subsequent discussions between U.S. and Iranian officials haven’t included specifics for a peace proposal, but instead focused on a possible framework for negotiations, said a person familiar with the matter. Rezaei said last week that Iran wouldn’t negotiate with Washington until specific core demands were met. (…)

Rezaei, who led the Revolutionary Guard through Iran’s 1980s war with Iraq, has emerged as an influential yet hawkish voice amid looming U.S. threats. Earlier this month, he said Tehran could target the United Arab Emirates, which has largely escaped being attacked since late spring, as well as data centers and internet cables across the region.

On Sunday, Rezaei took the rare step of meeting with security chiefs from Saudi Arabia, Pakistan and Turkey in Tehran, as all sides sought de-escalation. Most previous visits involved diplomats instead. (…)

The U.S. insists upon upfront nuclear concessions by Iran while Tehran demands immediate economic relief. (…)

Axios wrote: “The letter to Mohsen Rezaei, which focused on the possibility of restarting negotiations between the U.S. and Iran, is the most senior-level outreach by the U.S. to Iran in several months.”

The White House said Trump approved the letter. Not sure he read it.

Trump told reporters Wednesday that Vance’s letter was about helping Iran obtain needed medical supplies. “Basically, it’s getting supplies in to help people that are not well,” he said.

So many people are not well.

Yesterday: Pezeshkian: Regional States Can Resolve Challenges Without US – Tasnim (See my yesterday post about that)

Maybe that’s “the other side” Bessent is talking about: “Bessent also reiterated that both he and Trump believe that once the US gets “on the other side” of the Iran conflict, the oil market will be well supplied. He’s argued that that will help alleviate inflation and bring down borrowing costs.”

U.S. Warns Gulf of Possible Short, Intense Renewal of Iran War After Midterms

The U.S. has told several Gulf Arab countries to be prepared for a short, intense military campaign after the U.S. midterm elections, people briefed on the conversations said. (…)

President Trump hasn’t decided to go ahead but is leaning toward a large postelection attack that could target Iranian infrastructure and nuclear sites, people familiar with his thinking said.

The alternative would be to try to cut a deal. Diplomatic efforts by regional mediators continued but had yet to bear fruit. (…)

Many analysts believe Iran isn’t likely to capitulate under further attacks. Iran weathered more than 20,000 strikes by the U.S. and Israel during the most active phase of the war. It nevertheless has continued to attack ships in the Persian Gulf, target U.S. troops and warships, and bring tough demands to the negotiating table.

“I believe one of the biggest mistakes Israel and the United States continue to make is assuming that another round of strikes against Iran, including attacks on critical infrastructure or the elimination of senior officials, could somehow bring down the regime,” said Danny Citrinowicz, a former Israeli military intelligence official. (…)

Iran has warned through public and private channels that it would respond to any attack with harsh strikes on economic and civilian targets across the region. It made similar threats ahead of the war, then hit U.S. bases and diplomatic facilities as well as energy facilities and airports across the Gulf. (…)

Middle East mediators are scrambling to revive talks with Iran to head off a new wave of combat. So far they have had little luck, with the U.S. insisting on discussing Iran’s nuclear program and Tehran laying out tough demands for resuming talks.

No surprise there. Trump has been saying that for a while.

But here’s a surprise David uncovered that we have not seen in mainstream media:

 Iran and “Mecca Pact” countries agree to continue talks amid fears of renewed regional conflict (my emphasis)

Iran and representatives of Saudi Arabia, Pakistan and Turkey have agreed to continue diplomatic discussions following an initial meeting in Tehran [on October 26], amid growing concerns over a renewed escalation of conflict in the Middle East.

The talks brought together officials from the three countries that signed the “Mecca Pact” joint defence agreement, as regional tensions intensify following renewed hostilities involving Saudi Arabia and Yemen’s Houthi movement.

Saudi Defence Minister Prince Khalid bin Salman traveled to Tehran for the meeting, alongside Pakistan’s Army Chief Asim Munir, Turkish intelligence chief Ibrahim Kalin and other senior officials.

According to a statement from the Saudi Ministry of Foreign Affairs, the delegation’s visit was intended to “de-escalate the current crisis and promote dialogue and diplomatic solutions.”

Iranian state television reported Monday that the participants had agreed to continue discussions aimed at strengthening cooperation, including in the areas of regional peace and security.

The meeting took place amid warnings from the United States and Israel concerning the possibility of renewed military hostilities in the region.

It marked the first joint visit to Tehran by senior officials from Saudi Arabia, Pakistan and Turkey since the three countries established their defence alliance last August.

The diplomatic initiative comes against the backdrop of renewed confrontations between Saudi Arabia and the Iranian-backed Houthi movement, which resumed in July following the collapse of a truce that had been in place in Yemen since 2022.

Riyadh supports Yemen’s internationally recognized government, while the Houthis remain a major force in the country’s prolonged conflict.

The talks also coincided with the Egyptian parliament’s approval of defence support for Saudi Arabia in response to Houthi attacks originating from Yemen.

The agreement to maintain discussions signals a continued diplomatic effort by Iran and the three countries to address regional security concerns, although no specific commitments or outcomes beyond further talks were announced.

Reuters quoted a senior Iranian official as saying that Tehran’s talks with members of the “Mecca Alliance” did not cover Iran’s nuclear programme.

The official added that Iran would not discuss its nuclear programme until the United States responded to its demands for ending the war.

Significance? GCCs taking over their security, seeking durable solutions with Iran and the Houthis. The end of US presence in the Middle East?

• This meeting, set up within a week, was the first high-level contact between Iran and all members of the Makkah Defence Alliance since Saudi Arabia was drawn deeper into the conflict.
• Andreas Krieg of the London-based risk consultancy MENA analytica said Prince Khalid’s presence in Tehran was “hugely significant”, calling him the “strategic mastermind of Saudi Arabia”. Prince Khalid, brother of Crown Prince Mohammed bin Salman, the de facto ruler, has emerged as one of Saudi Arabia’s key diplomatic interlocutors, repeatedly dispatched on sensitive regional missions. “Riyadh is investing serious political capital in dialogue with Iran, seeking to contain escalation and create a credible diplomatic path out of the crisis,” Ali Shihabi, a Saudi analyst who is close to the government, posted on social media.
• All other participants were also very senior and influential people.
• A Pakistani security official told Reuters that participants discussed a regional non-aggression framework, US-Iran negotiations, Houthi attacks, shipping through the Strait of Hormuz and the US blockade of Iranian ports.
• Iranian President Masoud Pezeshkian said: “Muslims are brothers to one another and must stand together as a united front against threats and actions targeting Muslim nations.”
• Rezaei, Iran head of Supreme National Security Council, told state television, “Very good discussions took place between us. I feel that a new atmosphere is emerging in the region … I sensed a very positive atmosphere in the discussions among the gentlemen.”
• IRNA quoted Iran’s foreign ministry spokesperson Esmaeil Baqaeias saying that this meeting could be a prelude to further steps towards shaping “endogenous security — an issue that we have been insisting on for decades”. He added that the topic of “top priority on the agenda was consequences of the US-Israeli aggression against Iran and its ramifications for the entire region”. “We emphasise that regional security will not be ensured except by relying on the … security considerations of the countries of the region,” he said, adding that events of the last two years, especially the past eight months, had shown that sustainable and reliable security would only be made possible by “building trust and cooperation among the countries in the region”.

BTW, Egypt’s parliament authorized military support to help defend Saudi Arabia “if requested”, potentially drawing another regional power more directly into the confrontation.

Oilprice.com writes:

The oil markets are counting down the days until the November 3 midterm elections in the US, with expectations of impending hostilities rising into next month. Last-minute efforts to negotiate some form of de-escalation are ongoing, with both Qatar and Pakistan seeking to mediate between the Trump administration and Tehran, temporarily capping the upside for ICE Brent at $115 per barrel. Simultaneously to Hormuz tensions, the Saudi-Houthi conflict appears to be gaining self-sustaining momentum.

In reality, Saudi Arabia and other Gulf countries know that they will, again, bear the cost of another US attempt to find a win. They are proactively trying to protect themselves, seeking solutions among themselves, Iran and the Houthis. While Israel is pressuring Trump to hit, Saudi Arabia is pleading the other ways.

The GCCs, and the rest of the world, simply cannot allow this to become a forever war.

Hormuz is not as peaceful as many think as oilprice.com explains:

October has seen the most acute escalation in maritime attacks since the US-Iran war started eight months ago, with already more than 30 incidents recorded in the Strait of Hormuz and surrounding waterways, up from 14 in September.

The most recent addition to the list of maritime targets is a crude tanker in Iraq’s exclusive economic zone, signaling that it is not only tankers seeking to surreptitiously transit the Hormuz that get targeted by Iran.

VLCCs, the largest crude tankers available, account for 28% of all drone and missile attacks in the Persian Gulf, with the 32 impacted ships representing almost 4% of the global VLCC fleet.

Freight rates from the Gulf remain elevated, with a Saudi Arabia-China voyage still costing around $33 per barrel, whilst regional demurrage rates have been rising since mid-August to their current level of $1,000,000/day.

UKMTO, a provider of maritime security alerts, recently admitted that it is becoming increasingly more difficult to report on strikes as transiting ships prefer to sail unnoticed and charterers are wary of pushing freight rates even higher.

Meanwhile, “Yemen’s Houthis claimed a ballistic missile strike hit Saudi Arabia’s 550,000 b/d Ras Tanura refinery, causing a fire and disrupting operations at the Middle Eastern kingdom’s largest plant, with an earlier March attack shutting it for three months.”

US-Friendly Nations Slash Treasury Purchases by 60%, Led by Asia

Countries and regions most aligned with the US bought a net $174.3 billion of Treasuries, excluding bills, in the first eight months of 2026, according to an analysis of Treasury and State Department data. That was the lowest for the period since 2021 and down more than 60% from a year earlier.

The shift is noteworthy in Asia, where economies running large surpluses are putting less of that money into US debt. Japan, the biggest foreign holder of Treasuries, bought just $389 million in the first eight months — down 99% from a year earlier. South Korea sold $23.8 billion, the most for the period in records going back to 1977. Taiwan was also a net seller.

There’s no single explanation for the shift. Governments have said little about any plans to move away from Treasuries, and the data don’t separate government buying from private investment at the country level. Several factors may be contributing, including weak currencies, rising yields at home, growing demand for stocks and unease over US policy.

“The Treasury market isn’t losing foreign buyers — it’s losing automatic buyers,” said Masahiko Loo, a senior fixed-income strategist at State Street Investment Management, which oversees over $6 trillion. “An increasingly unpredictable US makes large structural overweights and the automatic recycling of capital into Treasuries harder to justify.”

The US government’s debt pile has climbed past $40 trillion, leaving the world’s largest economy more reliant on investors to fund its spending. At the same time, President Donald Trump’s tariffs and uncertainty over US policy have spurred concerns about the dollar’s longer-term outlook. And with yields rising in markets from Japan to Europe, global investors have more alternatives to Treasuries than they once did.

Asia’s big savers have typically converted their surpluses into dollars and parked the money in Treasuries. This year, weakening currencies eroded their buying power and pushed governments to dip into reserves. (…)

The Treasury data may attribute securities to the country where they are held through custodians or intermediaries, rather than to the nation of the ultimate owner. Holdings and purchases attributed to financial centers such as the UK and Belgium may therefore partly reflect investors elsewhere. (…)

That doesn’t mean the US is running out of buyers. Private investors, including hedge funds, banks and mutual funds, have stepped in, boosting their share of federal debt to about 70%, near the highest since 1990.

But they’re more sensitive to price. (…)

Even so, the $32 trillion Treasury market remains unmatched in its depth, liquidity and near round-the-clock trading, while the dollar retains its role as the world’s dominant reserve currency.

Foreigners still owned $7.85 trillion of Treasuries as of August, near an all-time high, though their share of the market has shrunk to less than a third from a peak of 52% in 2012.

“When you look at the alternatives, they’re pretty few and far between,” said Robert Tipp, head of global bonds at PGIM. “So you have had a rebalancing and consistent runoff from some countries, but it’s been absorbed by others.” (…)

“The Treasury will fund itself — the question is the price and the volatility of the price,” said Shoki Omori, Deutsche Bank AG’s chief fixed-income strategist for Japan. “What the level cannot buy back is the patient, price-insensitive money the allies used to supply.”

First time I see this data via Bloomberg:

Alignment can be subjective. This analysis, an update of one first published in February, classifies countries as most-, least- and neutrally-aligned by how often their votes on key United Nations resolutions match those of the US, using State Department data. The approach is commonly used in academia to determine allies and adversaries.

• There’s not enough money in the world to pay for the AI boom

Technology companies recently launched a record scramble for cash to pay for data centers, computer chips, and technology and equipment to power artificial intelligence. This boom is so expensive that even Silicon Valley giants are bleeding cash, and companies are now racing one another to collect or borrow other people’s money for the estimated $10 trillion of AI-related spending in coming years. (…)

In a widely cited draft research paper last month, Columbia University finance professor Stijn Van Nieuwerburgh estimated that it will cost more than $10 trillion through 2032 to build out AI, including data centers and computer equipment.

Measured as a slice of U.S. economic output, the average yearly AI spending works out to more than the combined national commitments for electrifying American households in the early 20th century, building the interstate highway system, and installing the backbone of the 1990s U.S. dot-com boom, he estimated. (…)

AI companies are starting to hunt for funds in nearly every imaginable financial nook and cranny to meet those immense costs, Van Nieuwerburgh and other experts say. They’ve been borrowing hundreds of billions of dollars, selling fresh stock, and cooking up more novel and potentially risky methods of financing.

Meta’s filing said Google, SpaceX, Anthropic and ChatGPT developer OpenAI all want cash to pay for their AI bets, which has “resulted in an increasingly challenging environment for raising capital.”

Some investors have spoken openly about the scary unknowns looming. Jas Khaira of Blackstone, one of the world’s largest investment firms, said it was unclear who would supply all the money that AI companies need. “We have some hypotheses, but the honest answer is we don’t know where all of it will come from,” he told the Information, a tech news publication, last month.

Even the U.S. government is paying more to borrow money because it is going head-to-head with AI companies for investors’ cash. “It’s causing a short-term competition for capital,” Treasury Secretary Scott Bessent said in a CNBC interview in August. (…)

Scott Bessent may be trying to downplay his challenges. This is not “a short-term competition for capital”, it’s going to be an on going competition that a debt-hungry US government can only lose against AI companies fighting for their dominance/existence. For many of them, the cost of capital is secondary to the access to capital.

Per Bloomberg, AI-related funding in global high-grade markets has already zoomed past $300 billion in 2026, roughly triple that of last year, providing investors with an array of choices after decades of low-yielding bonds.

The five major hyperscalers (Amazon, Alphabet, Microsoft, Meta, and Oracle) are projected to spend nearly $800 billion on capex this year and more than $1 trillion in 2027. JP Morgan expects that cashflow will only cover 20%.

Blackrock’s chief investment officer for global fixed income Rick Rieder says that the 10-year Treasury has “taken a backseat” to other opportunities in fixed income. Even with its yield above 5%.

The AI debt market will pull the entire interest rate curve up and the US Treasury will increasingly favor shorter-term financing right when the Fed might be raising short-term interest rates.

Let’s hope inflation stays reasonable.

BTW: @carlquintanilla quotes Goldman Sachs:

“.. we are starting to see clearer signs that the AI impact is spreading beyond the technology sector. .. the share of US firms that have adopted AI in regular business functions now shows a statistically significant negative correlation with employment growth ..”

Ed Yardeni:

September durable goods orders rose 1.8% m/m, the largest increase in five months. Orders excluding transportation increased 0.5%, while core capital goods orders (nondefense excluding aircraft), a key gauge of business investment, rose 0.5% and 13.5% y/y to another record high.

The average prices-paid index across regional Fed surveys stood at 57.0, near levels last seen in 2022. Meanwhile, the prices-received index climbed to 31.6, suggesting that manufacturers are increasingly passing higher input costs on to customers.

The chart shows that manufacturers are trying to pass their higher costs on to consumers but are only partially succeeding while cost inflation keeps accelerating.

China Set to Lead in AI Models, Other Key Areas by 2030, BI Says

China is well placed to lead the world by 2030 in the large language models at the core of artificial intelligence, and will be at least competitive in every other strategically important technology, according to a new Bloomberg Intelligence report.

The study predicts that China will be ahead in eight out of 17 key industries at the end of that period, including LLMs . In the other categories that are crucial to the AI race — producing the hardware needed to run it, from chips to optical networking components — Chinese firms are mostly behind now but will be competitive by 2030, the BI analysts led by Francis Chan wrote in the report published on Wednesday.

“The US and China are on track for joint technology leadership in AI by 2030, with neither country likely to achieve overall supremacy,” according to the report. American models may maintain a narrow lead at the frontier, while “China’s expertise in software optimization leaves it well positioned in lower-cost AI implementation,” it said. China will likely close the gap in semiconductor tech without achieving full self-sufficiency. (…)

None of this prowess is going to rescue China’s economy from a slowdown, according to the BI study. Bloomberg Economics predicts GDP growth will average 3.6% over the coming decade — down from 5.2% in the last three years. (…)

China’s AI firms — like peers elsewhere — are struggling to figure out how to make money out of their innovations. They “remain locked in a race to the bottom, with profit set to remain elusive until companies adopt a more rational approach to pricing,” according to BI. (…)

“Little excursions”

Cruise Ship Strands Passengers in Cambodia After Fuel Surge

Passengers on a luxury residential ship touring the world were unexpectedly stranded in Cambodia after the cruise company suspended operations, citing “extraordinary increases” in fuel costs.

Villa Vie Residences is now “working with residents to coordinate disembarkation and identify temporary living arrangements,” it said in a statement on Tuesday.

While the company is covering lodging and local transportation, it hasn’t provided funding for passengers to depart Cambodia, where the 650-passenger Odyssey is now moored, Villa Vie founder Mikael Petterson said during a telephone interview. About 200 residents were on board when the company was forced to ask them to disembark, he said.

The company’s fuel costs have risen more than 300% since the start of US-Israel war on Iran, Villa Vie said, with per-cabin fuel costs that had historically averaged about $1,800 a month surging to as much as $8,000. (…)

Passengers balked at a request to pay more to cover the cost of fuel to depart Cambodia. The company is now proposing an additional $500 a month fee, on top of a surcharge, as long as prices remain elevated, Petterson said, adding monthly operational costs have climbed by about 50% to $3 million. (…)

Marine gasoil has surged to $1,321 a metric ton in Singapore — the world’s largest bunkering hub — almost double what it cost before the Iran war, according to data provider ClearLynx LLC. (…)

Villa Vie is far from alone in feeling the brunt of the global fuels crisis. High jet fuel prices helped spell the demise of Spirit Airlines this spring, while Royal Caribbean Cruises Ltd. reported Tuesday that an otherwise strong quarter was dampened by elevated oil costs. (…)

According to port and maritime reports, the Villa Vie Odyssey was carrying 203 passengers of 15 nationalities when it was ordered to halt in Sihanoukville, Cambodia , including 159 US nationals, or about 78% of those on board.

Another excursion Americans will not be happy with.