Investors Are Using Bonds to Hedge Against AI: Peters

For the most exciting times investment periods I've ever seen. You're talking about the financing that's coming over the last, last few days before getting on an airplane. I spent the entire weekend looking at some of these transactions. I've never seen anything like in terms of the size of the financing that's coming in both debt markets, equity markets. I've spent much of my career waiting for 7% yields. Rick's excited. Here's the latest this morning. Tech giants unleashing another wave of mega financing deals to power artificial intelligence, pushing investment grade bond sales to an annual record of more than $1,700,000,000,000. Greg Peters of PJM joins us now for more. Greg, there have been some obvious headwinds to fixed income this year. Are they about to turn and reverse and turn into tailwinds in '27? I don't think so necessarily. I I... What I... You know, we have to get through the midterm election. I think that's crucial, in many respects because I think that could change the pace of this AI build out spending. I think it could change the pace potentially as a consequence of that AI build out slowing down of inflation and growth. And so I don't think so necessarily. I'm surprised that people are surprised. I mean, this quantum of debt story has been out there for quite some time. Now that it's coming through, people are waking up, and I... I'm surprised that, you know, they're realizing it's happening as it's been forecasted. Greg, where do you see an element of surprise? In the price action, in the commentary sentiment? Where'd you see it? Well well, you know, definitely the price action. The price action has been, you know, quite whippy. If you just focus on, I think, the US treasury market, I think it's quite instructive. Right? So just a couple weeks ago, you know, where rates were, you know, pretty meaningfully higher. The concern was that, you know, the Fed had to continue to hike to, you know, deal with inflation and growth and so on and so forth. And and then you had this little AI scare and... Growth scare. And then the bond market basically acted as the hedge. Right? And so I think that's what's happening now. Investors are using treasury security as a hedge to this AI story, which is a, you know, a massive one, of course. So I think that's the big switch over the past couple weeks or so. Greg, would you rather go into that duration story, or would you rather spend the weekend reading prospectuses and go all in on the AI dead story? Well, you know, I'm not sure if it's a binary function, of course, but I do see some value in race broadly. You know, I've mentioned before in the past, I don't love the back end of the curve. I think there's kind of the sum of all fears out there with respect to kind of term premium inflation, you know, setting higher and, you know, growth remaining quite, you know, strong. So to belly, I still prefer, but, you know, we do see a lot of opportunities in this AI build up, but it's not ubiquitous. Right? You know, you're seeing structures across all these different asset classes, whether it's high yield structure product itself, investment grade corporate. So I think details matter. I think a lot of investors are going to get run over by this story because they're just kind of plowing into it and not doing the work. But for debt managers, credit investors, you know, we've been waiting for this type of opportunity for quite some time, but details matter, and the size is just so large that you have to really be careful, when kinda going through it. Greg, speaking about structures, how concerned are you about these special purpose vehicles that are being deployed, whether it's Broadcom and the recent deal, to finance its products supposedly for Anthropic, a special purpose vehicle, or SpaceX. The idea that that is also an SPV in order to keep its IG investment grade rating. I mean, it feels like things are getting creative. Does that worry you, or does that excite you? Both. So they have to do it. Right? And so when you look at just kind of the, you know, the 5,200,000,000,000 that has to be financed here or slated to be financed, it it will come in all forms. It'll come in unsecured, secured, so on and so forth. And so these SPV vehicles are necessary and evil of innovation, so to speak. But from an investor standpoint, they're actually quite beneficial. Right? Because within those structures, you're getting waterfalls. You're getting back stop capital. You're you're getting guarantees. You're getting these things. So I I prefer these types of vehicles all else equal versus just the unsecured debt that's coming out of the hyper scaler. So details matter once again here, but in and of themselves, the SPVs are not a problem. They're actually an opportunity. But you're quite right. History shines a very poor light when you financially engineer these things for no real purpose. Lisa, to your point, are we wrapping up a mess at an IG wrapper? Is there something worse going on here that maybe we're not paying attention to? Yeah. Or maybe is that the one that you wanna buy and maybe not the unsecured bonds that have no assets left because they've all been wrapped up in SPV vehicles for other people? Greg, deceleration and rate of change. Is this the peak of it? Do you see things slowing through '27? From a from a economic standpoint and from a a build out standpoint, I think they're tied. But once again, I go back to the midterms. Right? And so there's one policy that seems like both sides of the aisle seem to agree on, and that's slowing down the AI build out, not in my backyard in terms of data centers. So I think that could potentially slow down not only economic growth, but also this, you know, AI build out. And I personally don't think it's such a bad thing. I think it's a very positive potential for bond investors both on a treasury side and for those direct investments themselves. So we'll have to see, but I do think there's gonna be some durability around slowing down, this this pace of growth here and the build out. Greg, thank you, sir. Greg Peters there of PGM credit into '27.