US Treasury yields fall as AI profitability concerns drive volatility

US Treasury yields are trending downward as investors seek safe-haven assets amid growing anxiety over the profitability of AI companies. While inflation remains a concern, high-yield corporate bond spreads have surged in October, fueled by instability in companies like CoreWeave.

Controversy surrounding the profitability of the US AI (artificial intelligence) industry is increasing volatility in financial markets and turning US Treasury yields into a downward trend. As stock price fluctuations of major AI tech companies lead to concerns over a real economy recession, investors are flocking to Treasury bonds as safe-haven assets.

Woori Bank economist Choi Jin-ho analyzed recent trends in the US financial market through 'Morning Economy Plus' on the 2nd (local time). "Financial market volatility is rapidly increasing, centered on the stock prices of recent US AI hyperscalers," Choi diagnosed. "As the controversy over the investment profitability of AI companies acts as stock price volatility, a reflex preference for safe-haven assets is strengthening, causing US Treasury yields to fall rapidly."

Treasury yields fall without inflation decline due to 'AI anxiety'

Recent movements in the US bond market appear somewhat detached from general economic indicators. Since the beginning of this year, US 2-year and 10-year Treasury yields had maintained an upward trend following the direction of benchmark interest rates, but they underwent a sharp reversal toward a decline in October. An unusual situation has occurred where Treasury yields are falling even though the Fed maintains a restrictive stance alongside a freeze on benchmark interest rates.

Robust inflation indicators lie at the background of this phenomenon. According to Choi, US core services inflation currently shows strong downward rigidity at the 2% level, and the rising trend in oil prices is pushing the inflation rate upward, meaning the inflation situation is actually worsening. In other words, the analysis suggests that yields are not falling because inflation has decreased, but rather because anxiety caused by the stock price volatility of AI companies is leading to Treasury buying, which pulls yields down.

In particular, it is notable that the spreads (the interest rate difference between Treasury bonds and corporate bonds) of corporate bonds issued by AI companies have widened significantly. A widening spread means that corporate bond prices have fallen. In October, spreads surged, centered on the US tech sector, increasing instability in the overall high-yield (high return, low credit) bond market.

Crisis for high-yield companies like 'CoreWeave'; will it spread to Big Tech?

The neo-cloud company 'CoreWeave' has been mentioned as a case symbolizing recent market instability. CoreWeave is a company that shares the AI ecosystem and has recently been classified as a high-risk company. While the so-called 'Big Five' hyperscaler companies—Microsoft, Alphabet, Apple, NVIDIA, and Meta—maintain top-tier investment grades (AAA to A-), CoreWeave is a high-yield company with a speculative BBB-grade credit rating.

In fact, the price of CoreWeave's corporate bonds has at times fallen below 70% of their face value. Such concerns regarding the insolvency of individual companies have triggered a rise in spreads across the high-yield bond market. However, Choi explained that while high-yield spreads have surged, the Credit Default Swap (CDS) figures for investment-grade corporate bonds remain at a considerably stable level, meaning it has not yet led to a total market collapse.

Similar flow to the 2023 banking crisis... focus must be on 'individual risk'

Regarding whether the current situation resembles any past economic crises, analysis suggests it is similar to the US regional banking crisis that occurred in March 2023. At that time, there was a case where high-yield spreads soared alongside a surge in Treasury yields as banks failed. However, back then, the market was able to recover quickly through policy responses, such as the injection of public funds by the Fed and the FDIC.

Whether policy responses will be available for this current AI corporate bond instability is the key factor. Choi pointed out, "If a company falls into default, there is a lack of logical grounds to inject public funds, unlike in a banking crisis." Therefore, the scale of the crisis and whether it spreads are the core issues.

He forecasted, "The main factor causing current anxiety is small-scale high-yield companies with low credit ratings. If these risks do not spread to large hyperscaler companies like Meta, it is highly likely that this situation will conclude as individual corporate risk rather than systemic risk."

Source: original video (YouTube)