Global Capital Crowding Out
Simultaneous sovereign, AI, and corporate borrowing demand pushes real yields to 2008-era highs
US federal debt has crossed $40 trillion with persistent deficits and no recession in sight. AI hyperscalers plan roughly $1 trillion in capex next year — four times the inflation-adjusted cost of all Apollo missions combined. Corporations must simultaneously refinance cheap post-COVID debt at far higher rates. With Japan and Europe also competing for global capital, lender supply is shrinking relative to borrower demand. Treasury buybacks shift maturity composition from the long end to the short end — a form of "Treasury QE" — but do not reduce the debt stock. Real 30-year yields have reached levels unseen since the 2008 financial crisis, and the long-duration Treasury ETF has lost roughly 60% from its peak.
| Instrument | Side | Target | Reason |
|---|---|---|---|
| TLT | Short | We believe long-duration US Treasuries face structural headwinds as sovereign, AI, and corporate borrowers compete simultaneously for a finite pool of global capital, keeping real 30-year yields elevated. With no credible path to fiscal consolidation and a relentless refinancing calendar, further duration pain is likely over a multi-year horizon. |
Japanese capital repatriation threatens US Treasury demand and equity market leverage
Japanese insurance companies are the critical marginal buyer of global debt. Rising JGB yields reduce the incentive for Japanese capital to seek returns abroad, while a weakening yen creates additional pressure to repatriate. China has been a persistent seller of Treasuries for years, eliminating another traditional recycling mechanism for US deficits. If Japanese capital comes home in size, US Treasury demand falls at the worst possible moment — when issuance is at record highs — and leveraged equity positions concentrated in roughly 20 large US stocks could unwind simultaneously.
Credit markets price AI capex as a near-term risk while equity markets price it as a moat
AI hyperscalers plan to spend roughly $1 trillion on data centres, power generation, and chips in the coming year. Equity investors interpret this spending as evidence of a durable competitive moat; credit investors, whose upside is simply getting repaid, see it as refinancing risk on a fixed schedule. Corporate debt issuance is surging as AI borrowing takes a growing share of capital markets. Financial models project margin expansion and capex normalisation by 2029, but credit markets must live through every quarter before that date. The divergence between equity optimism and credit caution historically resolves in credit's favour.
Themes
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