The Big Tech Bond Paradox, Explained: 1. The United States just hit $40T in debt. The only way for us to deal with this is growth because no political party is ready to cut spending. 2. How are we getting that growth? AI CapEx. That CapEx is coming from Big Tech companies like Meta, Google, Microsoft, Amazon, Oracle. 3. How have those Big Tech companies been funding the capex? Well, initially it was their free cash flow, but that dried up so now, it's by issuing bonds. Google issued a 100 year bond with a 6% yield. Meta and Oracle have 6-8% yields as well. 4. The US 10-year treasury is yielding 4.7% and the 30-year is yielding 5.2%. The US sells these treasuries in order to fund the government. People buy them with an expectation that it is the safest return they can get because the US will never default on their debt. The yields that are currently being offered are the highest in decades. 5. What's the problem? Well, the Big Tech companies are giving bond yields at 200-300 basis points ABOVE what the US Treasury is offering...which is an issue because if you are a credit investor and don't think that Meta or Google are going out of business...why would you not buy their debt over the US debt? As a result, people are SELLING US treasuries, causing yields to go higher, and buying Big Tech corporate debt. The paradox in all of this is that Big Tech NEEDS to issue this debt in order to continue to spend on capex and that same capex growth is what is supposed to solve our debt issues! If Big Tech stopped spending on capex, we wouldn't have any growth, but in order for them to grow, they have to issue bonds with high coupons and take away money from the long end of the curve for US treasuries, causing the highest yields we've seen in 20 years. The simple way to resolve all of this is to end the Iran War because oil prices will go down, inflation expectations will go down, and credit markets will buy up US treasuries yielding 4.5-4.7% since they will be getting a great yield on lower inflation expectations. The problem is, the war hasn't stopped for months and the market doesn't think it's stopping anytime soon...which means until it does, we have to deal with higher oil prices, higher yields on bonds, and more uncertainty for stocks if the credit market continues to scream that they need yields to come down.
