AI Debt Boom Faces Bond Market Reality Check

Author: Bloomberg Television · Watch on YouTube

Video authored by the channel shown, not by IANIA; all rights belong to the creator. Transcript and summary generated automatically; the original-language content is preserved.

Original language: English

Original video: AI Debt Boom Faces Bond Market Reality Check · Channel: Bloomberg Television · 08:03 · Watch on YouTube

Topics: Enterprise AI applications

Summary

PIMCO strategist Tony Crescenzi discusses rising U.S. interest costs and argues that addressing the debt burden may eventually require a politically difficult policy shift. He says bond markets are increasingly enforcing discipline on borrowers, from AI infrastructure companies such as CoreWeave to governments with high deficits. Crescenzi expects divided government to be broadly favorable for markets, while noting that AI regulation is more likely to emerge locally than federally. For upcoming tech earnings, he will watch how markets react to the information and whether negative narratives gain traction.

Key points

U.S. net interest costs reached $1.05 trillion, or 3.2% of GDP, and Crescenzi says they could reach 4% by the end of the decade.
Crescenzi describes a possible 2029 “read my lips moment,” when a president may need to take an action that runs against their party’s usual position to address the debt.
Rising borrowing costs can divert money from the private sector and hurt some companies, while creating attractive conditions for bond investors.
CoreWeave’s junk bonds reaching 15% illustrate the bond market’s willingness to demand discipline from borrowers whose cash flows are uncertain.
Bond-market discipline can affect governments as well as companies; Crescenzi cites France’s deficit and the 2022 bond-market reaction to Liz Truss’s proposed borrowing.
Companies with unclear revenue and cash-flow prospects may find it increasingly difficult to borrow, especially lower-rated issuers.
Crescenzi says historical patterns since 1938 favor stock-market gains in the year after a U.S. midterm election, and investors tend to like divided government.
AI-related rules may be more likely to arise locally than federally; Crescenzi says the sector is still early in its development.
For the coming earnings reports, Crescenzi will focus on whether markets embrace negative or positive narratives rather than only on investment spending or valuation.

Chapters

Start	Chapter	Summary
00:00	Rising interest costs and the debt challenge	Crescenzi compares current interest costs with past political turning points and says a difficult policy change may be needed to tackle the debt.
02:09	Bond-market discipline and CoreWeave	The discussion turns to borrowing costs, CoreWeave’s high-yield bonds, and how bond investors assess borrowers with uncertain cash flows.
04:19	Credit selectivity and the election	Crescenzi says weaker borrowers may face tighter financing and discusses the historical market case for divided government.
06:29	AI regulation and the earnings outlook	Crescenzi discusses potential local AI regulation, the sector’s early development, and what he will watch in upcoming earnings.

Quotes

So, that trillion dollars, David, that you mentioned, is 3.2% of GDP. — 01:05

It’s a really great time to be in bond investing — 02:09

the bond market is beginning to impose discipline upon that nation. — 03:12

Investors love uh divided government. — 05:22

more how markets respond to the information — 07:32

Concepts and entities

PIMCO, Tony Crescenzi, CoreWeave, bond market discipline, cash flow, divided government, S&P 500, total factor productivity, George Bush, Bill Clinton

Full transcript (original language)

00:00 Tech stocks are going to be looking for a major rebound this week after Friday’s downturn. The Nasdaq 100 lost 5 and 1/2% for its worst week in 18 months. >> All this coming ahead of a crucial week of earnings, particularly with some of the biggest names in tech. Joining us now is Tony Crescenzi, market strategist for PIMCO. Tony, we want to get into core weaving junk bonds and all the like, but let me start with something I spotted this week. The Treasury Department releasing data on Friday. Net interest costs came to 1.05 trillion dollars. How do you look at that backdrop as you look at the market, as you look at bonds in in particular? >> to the interest payments often when

00:31 people ask about the government debt, and they do very often. I like what I try to refer to the current situation is as a read my lips moment. Now, let me explain. In 1988, George Bush as candidate at the convention, in a speech written by Peggy Noonan, who wrote speeches for Ronald Reagan, she said the biggest takeaway from the convention is when George Bush said, “Read my lips, no new taxes.” 1990, as president, George Bush raised taxes, anathema to the Republican Party. Typically, doesn’t raise taxes because the interest on the debt reached a record level back then, 3.2%

01:05 of GDP. So, that trillion dollars, David, that you mentioned, is 3.2% of GDP. So, we’re back to that level for for the first time, likely to reach 4% by the end of the decade. So, the read my lips moment is in 2029, when a president has to do something that’s anathema to his or her party. One final note on it, Bill Clinton did as well. He cut the capital gains tax rate, even though he raised the top tax rate, but it’s been fluctuating for 40 years in the high 30s. It’s no big deal, really. So, he did something anathema to the party. The two The actions by those two presidents led to four years of budget

01:36 surpluses eventually by the end of the 1990s. So, we need a president to in a read my lips moment in 2029, when taking office, to do something different than the party might expect, because that’s the only way to tackle this problem is to do something unusual. >> But it it’s such a policy conundrum, right? Because you don’t want to be someone who’s raising taxes on your donors, on your investors. You don’t want to be seen as stunting growth or the market, but at the same time you’re getting to a point where this in itself could stunt the market. It is starting to hurt financial products. It is starting to make a difference. >> Cuz in the end, it’s sapping money away

02:09 from the private sector. It’s raising borrowing costs, and raising borrowing costs, as you you you’re seeing in the financial markets, can hurt some companies. Now, it’s great for bond investors. It’s fantastic that the rise in bond yields is occurring. Uh it’s a really great time to be in bond investing because it’s a global borrowing binge that letting bond [snorts] investors sort of set the terms for um for certain bonds uh for if if they’re if they’re idiosyncratic and um or structural bonds uh structured bonds, etc. But it’s it’s just a good time right now in that sense from the bond investors’ perspective.

02:41 >> We’ve been through this crazy week where there was so much attention on Coreweave and how much it’s having to borrow to build out all of the AI infrastructure. Right on those Coreweave junk bonds hitting 15%. What does that tell you? How interested are you in that company? What does it tell you? What’s it emblematic of when you look at the the market in the AI universe more broadly? >> Well, it’s not considered to be uh amongst the strongest. It’s not a hyper scalar, so to speak. And so, what it’s showing you is that the bond market is willing to impose discipline on lenders that may have

03:12 cash flow that’s less uh clear to them. >> Diplomatically put. >> So, it may not It may not apply to simply lower-rated companies. It can eventually apply to high-rated nations. Look at the nation of France. Considered uh much better as a credit as a credit, but it has a very high budget deficit, and the bond market is beginning to impose discipline upon that nation. It did so as well in 2022 with Liz Truss, the prime minister. She attempted to raise the budget debt budget deficit, which would have meant

03:45 more bond borrowing. Bond market said, “No, you won’t.” And the bond yield there, the 10-year yield, rose 150 basis points in a few weeks, which is dramatic for a government bond market. So, it can So, the core we story can be applied to all borrowers, even those with the high credit ratings, if it’s if the bond investor believes that the cash flow story is a little bit questionable or at least not clear not and and that’s that’s what’s happening. >> Do you think this is a moment for junkier bonds in the [clears throat] AI space that people are going to be more specific, pickier about what credit

04:19 looks like before they make these investments? >> And I of recent weeks with the lower tier performing underperforming, it’s it’s it’s being socialized. The story’s being socialized. So, it’ll make it more difficult for those that do not have the clear cash flow story >> [snorts] >> to borrow money. Now, cash flow in the end, what I’m talking about is simply revenue, money to pay the bond investor back, money to pay the bond investor the interest he or she or it expects every few months or every 6 months or every year. So, it’s it’s it’s sort of moving in that direction that you know, that the bond investor is simply imposing

04:51 discipline again and it’s social it being socialized. It’ll just make it more difficult for the for the lower end of the rung. >> How are you thinking about the upcoming election? We’re just talking with Chris Pappas who’s running for Senate seat up in in New Hampshire. We’ve been talking about this expectation among Democrats that they’ll take over the house. Maybe the Senate’s more in play than they would have would have assumed. How do you think about what that means for policy? Were were there to be a complete turnover in control of Congress? >> Uh history’s clear of this. Investors love uh divided government. Uh it’s since 1938

05:22 the S&P 500 has increased in value from the in the one-year period after a midterm election. So, from November November of ’26 to November of ’27, the odds are, based on history, that the stock market will will rally. And now, importantly, the >> But, why is that? Is that cuz they know the government can’t get any regulations done? >> Cuz it can’t get in the US is a capitalist society and capitalists like government to be out of the way. And in the at the mid term point, it usually is out of the way because there can be no legislation

05:56 to upturn things. Now, the important thing is in the early parts of the Trump administration, there’s been a significant amount of tax cuts and deregulation. This is the invisible hand allowing the capital the capitalist to do what he or she wishes to do, which is to invest freely without interruptions to to expect that the sales could be better in the future. So, I’d So, I’d say that that’s not doesn’t just apply to the stock market this idea. If the stock market fares well, the credit market that of the fixed income market can fare well because there’s what they call the

06:29 equity beta in the credit markets will tend to mirror what’s what’s happening thematically in the equity market. So, it’s probably a good year ahead for equity investors, credit investors, and fixed income investors more broadly. >> When it comes to the AI space, there is fear that if Democrats get control of both chambers, there could be some regulation. There could be some limits. Is that why you’re seeing that combined with everything else a bit of a breath in that space? >> Well, the way we would think about it, many are thinking about it is that that the the AI related regulations, if they occur, more likely to occur locally than

07:02 federally. Especially with the with divided government. So, we should just look for moratoriums and that sort of thing perhaps, but AI is in the top of the first inning. There’s a long way to go. We’re We haven’t reached what they could call the application phase. The economists will call it the TFP, total factor productivity, is when companies applies people and stuff to become more productive. Productive that stuff being the AI investments. And so, there’s a

07:32 long way to go on that story. >> out. Yeah. >> Very quickly, you’ve got about a minute left. Big big week for earnings as we mentioned. A lot of these tech companies reporting. What are you going to be focused on? Is it the Is it the investment CapEx, valuation similar What are you watching for in those earnings that come out in the week ahead? >> Uh more how markets respond to the information, whether or not they believe whether they’re they’re willing to take run with the negative narratives or the the positive ones. But as I said with the story probably still in the the first inning for AI, it’s not likely that the the negative narrative takes

08:03 hold. But if it does, that would be quite interesting, probably beneficial for bond yields which are awfully attractive relative to history, expected inflation, expected volatility.