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AI Word is Bond

AI bonds are a small part of the debt market. Could they really crowd others out?

Source: iShares AU IHCB

You'll note that many big players in the equity space - Alphabet, Netflix, Apple, etc. - aren't big enough to get labels on the chart.

Furthermore, hundreds of billions in corporate debt pales in comparison to the many trillions in sovereign debt. 

So why is AI related debt considered such a huge threat to public funding? 

Bonds aren't just differentiated by issuer, but also by maturity. One-year, two-year, up to hundred-year. They're all different beasts.

Debt for data center buildouts plays in the same decades-long space as governments, where there are fewer buyers. A glut of 10-year AI paper may sate the appetite of institutional investors, leaving them with little room for, say, US Government 10 years. 

The resulting price pressure on 10-year debt will definitely impact Social Security, which needs to sell its holdings to keep paying recipients.

So let's add to the list of tech's crimes making it harder to maintain social safety nets. 

Bad Robot

But why blame AI? What about the others?

Let's say the investment choice is between:

  1. Highly-solvent hyperscalers offering 8% on a technology that is already disrupting work flows and the concept of intelligence itself, or:
  2. Already-indebted Governments offering 4% to helicopter your principal onto welfare recipients in the hope that they will return the "cost of living assistance" favour by not voting in Nazis (or worse Nazis).

I'm choosing the former. Sorry, not sorry.

Capitalism is supposed to welcome competition.

Now that there's actual choice for long-term fixed income, it is upon relatively 'meh' incumbents to lift their game.

Good thing they have options other than sobbing about higher interest costs. They can:

  • Issue at shorter durations. Of course, this means repaying or refinancing within shorter durations.
  • Expand alternatives. In the case of corporates, it could be private equity. For governments, taxes.
  • Deleveraging. Austerity. Streamlining. (Shock, horror.)
  • Ask AI for a five step business plan (LOL). 

In short, they could compete. 

The market has signalled that there is debt they see as more productive to allocate towards.

AI is too small to break the bond market, but big enough in its niche space such that the market forces adaptation.

That does not sound threatening to me. 

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Location: Nihonbashi, Chuo City, Tokyo 103-0027, Japan

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