Savers and investors at current yields stand to benefit, and the stocks of the so-called Magnificent Seven tech giants have acted as a 'safety trade'
It could cause pain if the 10-year Treasury yield hits 6%.
Not everyone agrees about why Treasury yields surged past 5% in recent weeks, but fewer people have been willing to rule out 6% as the next possible stop.
JPMorgan Chase (JPM) CEO Jamie Dimon joined the debate Tuesday, saying he isn't predicting the all-important 10-year Treasury yield BX:TMUBMUSD10Y will hit 6%, but that people need to prepare for it.
Dimon said another 1% increase from the 5% level reached in September would be more painful than the 1% climb in the six months after the start of the Iran war in late February, as the below chart shows.
That has pushed up borrowing costs for households, farmers, corporations and the U.S. government, creating an ugly mood among consumers ahead of the midterm elections. The housing market has long been sidelined as mortgage rates rose, while climbing yields have begun to weigh on this year's big rally in stocks of small-capitalization companies RUT and other interest-rate-sensitive parts of the stock market.
There's a view within the Trump administration that higher yields serve as a positive reflection of strong U.S. economic growth powered by the historic artificial-intelligence buildout. That could give the four-year-old bull market in stocks more room to run. Or, it could just keep pushing up the cost of money.
Others suggest higher yields stem from the huge capital needs of the AI spending boom, inflation concerns, the nearly $2 trillion U.S. budget deficit, the $40 trillion national debt and heavy Treasury issuance of bonds required to fill the funding gap.
"So far, the markets have been open to these companies," said Tom Murphy, senior portfolio manager at Columbia Threadneedle Investments, referring to the roughly $250 billion deluge of AI-related debt that's hit the high-grade corporate bond market this year.
That's out of nearly $900 billion in expected capital expenditures from the AI "hyperscalers" and SpaceX (SPCX )this year, with that figure set to top $1 trillion annually through 2030, according to Columbia Threadneedle estimates.
Savers and investors in bonds at current yields stand to benefit from the huge borrowing need. Yet fears about the rest of the economy's vulnerability to higher rates already has reignited a "safety trade" in AI stocks.
That's pushed the Roundhill Magnificent Seven ETF MAGS up 6.4% from a month ago through Tuesday to act as a bit of a hedge against rising rates. Over the same time, the 10-year Treasury yield has increased by roughly 1.3 percentage points, while the S&P 500 SPX has advanced 2%, according to FactSet data.
In a new twist, longer-dated Treasurys have begun to catch a bid - causing yields to ease - on days when highflying parts of the AI trade, including the semiconductor-heavy South Korean stock market, have faltered. Yields fall when bond prices increase.
Any continuation of recent haven-buying on AI worries could prevent Treasury yields that recently touched their highest levels in 24 years from moving much higher. Concerns about the health of the U.S. economy also could drag yields lower.
The 10-year yield at 5.23% on Tuesday remains a "country mile" away from 6%, said George Catrambone, head of fixed income, Americas, at DWS. But higher yields already have been creating stress in areas of the economy that aren't related to AI.
That stress would spread if yields continue to push higher, Catrambone said Tuesday. That could make access to capital harder to come by and more expensive for borrowers. Households facing high gas and energy prices from the Iran war, and five years of elevated inflation, would also feel more of the pinch.
"There's a lot of complacency around AI," Catrambone said, while adding he's not negative on the theme. "But it's glossed over a lot of parts of the economy that are at least flashing caution signs."
-Joy Wiltermuth
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