Big Tech AI Investment Drives Up Treasury Yields

Analyst Shin-eol rated the August market at 65 out of 100 points. Although there was an increase compared to July, it did not fully meet market expectations, and overall momentum decreased as macro variables (war, oil prices, Jackson Hole Meeting, etc.) heightened anxiety towards the end of the month.

For the September market outlook, analyst Shin-eol expects the domestic market to be at 65-70 points and the US market at 70-75 points, expressing hope for a simultaneous rise. However, the domestic market is likely to experience a stronger wait-and-see attitude due to quarter-end rebalancing and holidays, with supply gaps and a decrease in individual investor trading volume and turnover affecting the market.

Regarding H2 portfolio management, September is a period where active vitality tends to decrease after summer vacations. Analyst Shin-eol explained that the market might see a temporary boost in October rather than September, and active management could be restricted in November and December due to book closing.

Looking at past Fed policy decisions, key policy inflection points tended to be delayed when market tensions were high. During discussions on quantitative easing tapering after the 2008 global financial crisis, the Fed delayed the tapering by three months, starting from the year-end, considering market tensions. This suggests that a major policy inflection point expected in September could also be delayed depending on market conditions.

A rise in bond yields means a fall in bond prices, and the core issue in the current bond market is a supply-demand imbalance. Analyst Shin-eol cited the market adage, "There is no match for volume," analyzing that the supply shock caused by a surge in bond supply is the main reason for rising yields. This supply-demand imbalance is likely to continue for some time.

The US federal government's interest expenses have surged, exceeding defense spending. Last year, interest expenses as a percentage of GDP were 3.15%, but this year they are expected to rise to 3.3%. The total federal government debt has surpassed $40 trillion, resulting in $1 trillion in annual interest payments alone.

The Congressional Budget Office estimates that US annual interest expenses will increase by $100 billion each year, reaching $2 trillion annually by 2035. This signifies a structural crisis where the current annual pace of debt increase equals interest expenses. The vicious cycle of increasing debt and interest burden exacerbates concerns about fiscal health.

The US has attempted debasement (currency devaluation) three times in the past, but only one was successful. The sole success was possible under special circumstances during World War II when the Fed and the Treasury closely cooperated. However, the current environment is significantly different from the past, with strengthened Fed independence and faster capital movement, making the success of debasement unlikely.

The volume of US bond issuance is rapidly expanding. Last year's issuance was $11.5 trillion, and this year it is expected to reach approximately $13 trillion. In particular, the increase in corporate bond issuance is much larger, at 38%, than the increase in Treasury issuance, exacerbating the overall supply glut in the bond market. While the volume of bonds issued is increasing, the demand to absorb them remains uncertain.

As big tech companies intensify their AI investment competition, corporate bond issuance is surging. This large-scale corporate bond issuance is intensifying competition with Treasury bonds for investor attraction, leading to a situation where issuers must offer higher interest rates due to oversupply. This contributes to increased upward pressure on interest rates across the bond market.

CAPEX (Capital Expenditure) investment, centered around big tech and Oracle, is accelerating. Massive AI investment funding, conservatively estimated at approximately $750 billion and aggressively at over $850 billion, is driving the corporate bond market. With investment-grade companies leading the issuance, large amounts of capital are being absorbed into the market, further intensifying the supply-demand imbalance in the bond market.

As competition in bond issuance intensifies, investors are demanding higher interest rates. This is technically called the term premium, which reflects the market's psychological demand for interest rates as compensation for the risks investors undertake. A rising term premium directly leads to higher market interest rates.

The US Treasury believes that the Treasury and corporate bond markets are separate and that the Treasury can manage Treasury yields independently. Furthermore, it presents an optimistic outlook that AI technology growth will lead to lower inflation through productivity improvements and job displacement. However, market investors still express skepticism about the Treasury's rosy outlook, pointing out a discrepancy with realistic market conditions.

In the current stock market, a strategy is proposed to be ready to flee but respond immediately if unusual signals are detected. However, it is advised not to flee too far and to return quickly to maintain a portfolio centered on US AI investments. It also emphasized caution against investing in illiquid assets.

If an interest rate spike occurs, pushing rates above their upper limit, the US Treasury is unlikely to condone it, and policy cooperation with the Fed is not immediately realistic. However, analyst Shin-eol believes that signals for market intervention during a rate spike are consistently being detected, so attempting bond investment at current rate levels is not a bad idea.

The September market faces a challenging situation with multiple variables such as the FOMC meeting, Micron's earnings announcement, and the domestic Chuseok holiday. However, analyst Shin-eol advised that in the world of investment, rather than exiting easily, a strategy of holding on over time can lead to a rosy future. Investors should closely monitor upcoming key events and respond cautiously.