Yesterday, AI had a bad day. Chip stocks were routed.
Micron down 7%, SanDisk 9%, Intel 7%, AMD and Nvidia along for the ride. Tokyo’s Nikkei fell 2.9%, with Kioxia off 10% and half the AI supply chain in double digits.
Is it all over? Almost certainly not.
What gave way yesterday wasn’t an appetite for AI. What changed was the price of time.
Growth equities are long-duration assets; their value sits on cash flows years out. So when the long bond reprices, the longest-duration assets fall first and fall hardest. The bond market hasn’t repealed the AI story; it is repricing it.
Some comments suggest that Anthropic’s $65 billion run-rate was received as a disappointment. It was “behind some market hopes.” A company compounding at a pace never matched in corporate history was insufficient. That is not a demand problem; it’s an expectations problem.
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Sovereign yields are at multi-decade highs almost everywhere. We know that bit. The US 30-year touched 5.34% on Tuesday, a near-20-year peak; German yields sit at 2011 levels; the French 30-year is up almost 50 basis points since June; Japan’s once-zero 10-year is closing on 3%.
“Investors are no longer taking on faith that spending gets brought under control,” said deVere’s Nigel Green. “They’re pricing the risk that it doesn’t.” And to complete Nigel’s sentence for him, “and the bond vigilantes will do it for them.”
That same repricing is now reaching the AI money machine itself. At least seven investment-grade issuers reportedly pulled their bond deals on Tuesday as spreads widened and supply swelled. The marginal buyer of long-dated paper, as ANZ’s Jack Chambers put it, “is becoming a bit more price sensitive at a time when there’s a lot of debt issuance.” The $1.5 trillion that funds the build-out has to clear a market that is, all at once, more crowded and more choosy. The US Treasury is testing the same waters today with $16 billion of 20-year debt.
The bond sommelier’s list is changing. What would you care for today, sir? A bottle of Uncle Sam 2046 or this more robust and competitively priced Google of similar year?
Meanwhile, Bank of America’s latest survey has fund managers more heavily in equities than at any time since November 2021, betting on a global “boom.” Foreigners bought a record $919 billion of US stocks over the last 12 months, which Ed Yardeni notes typically signals a top.
But Yardeni remains optimistic. Rising yields are not distress signals. He moves the context window from the typical “higher for longer” to “normal for longer”. By his reading, rates are returning to their pre-2008 range and reflect a healthy economy, not a breaking one. He also doubts the yen-carry unwind now rippling through global bonds becomes the crisis some fear. A highly experienced view worth considering before reaching for the panic button.
The question is what multiple is right for cash flow arriving in 2032 at a 5% long bond? Or will it soon be 6%?
Which lands us with the Fed. Starved of guidance, and about to get a little. The minutes of July’s meeting arrive this afternoon, and the market is reading the leaves for whether the three dissents that wanted a hike were, as Mizuho suspects, “the tip of the iceberg” of a committee quietly turning hawkish.
Odds of a September hike slid to 59% from 82% right after that meeting, but a Warsh Fed of terse statements and cryptic pressers has left everyone guessing, and the minutes may reveal more appetite to tighten than the market is carrying.
So, AI demand didn’t break, but the discount rate did. Financing hit a wall, while equity positioning is at a five-year high. Bond yields are gravity, and gravity is patient; markets adjust.
As the excellent Mark Farrington said:
Prices falling or yields rising are rivers flowing to the sea. Prices fall until they find new buyers. Cycle of life stuff in the financial markets.
Everything is proceeding normally.
Good luck out there.
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Jeremy