Surge in bond yields raises new 'black swan' risk | Cash Call | Andrew Wong

Global financial markets may be facing a new "black swan" risk, as bond yields have risen significantly across major economies, including the United States, the United Kingdom, Germany and Japan. 

While there are multiple factors behind the rise in yields, the market has largely focused on persistent inflationary pressures, particularly the difficulty of resolving the Middle East conflict and the resulting risk of elevated oil prices. 
 Brent crude has traded near US$100 per barrel amid supply risks, pushing up households' motor fuel costs and utility bills and renewing inflation threats. 

However, another important factor may be receiving insufficient attention: the surge in corporate debt issuance to fund the massive investment required for artificial intelligence. 

As technology companies continue to increase their AI spending, many have turned to the bond market to raise capital. This has significantly increased the supply of corporate bonds, putting broader pressure on global bond prices and, consequently, pushing yields higher. US tech companies issued more than US$600 billion of debt in the first half of the year to support AI-related investment, while a number of companies have also announced plans to raise a further US$200 billion through equity or debt issuance in the near term. 

Such fundraising could absorb additional liquidity from financial markets and add further pressure to bond yields.

The recent move by the US Treasury to increase its purchases of longer-dated Treasuries, from around US$2 billion (HK$15.6 billion) to more than US$4 billion, illustrates the challenge. 
 Despite the larger buyback program, the impact has been limited. The 10-year Treasury yield briefly declined before quickly returning to around 4.7 percent. 

The market appears to view Treasury buybacks as a temporary solution rather than a fundamental answer to the problem. US fiscal pressures remain substantial. Even if the Treasury reduces the supply of long-term bonds through buybacks, it may still need to increase issuance of shorter- and intermediate-term debt to finance government operations. This could create a vicious cycle, ultimately keeping upward pressure on yields across the Treasury curve. 

Against this backdrop, the combination of persistent geopolitical and inflationary risks, heavy government borrowing and the enormous financing requirements of the AI investment cycle could keep global bond prices under pressure. 

For equity investors, this is an issue that should not be overlooked. Higher bond yields raise financing costs, tighten financial conditions and increase the discount rate applied to future corporate earnings. If the pressure on global bond markets persists, it could become an increasingly important source of uncertainty for stock markets worldwide. Investors should therefore remain particularly alert to developments in bond yields and the sustainability of the current debt-financed investment boom. 

Andrew Wong is a veteran independent commentator

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