Man Group: 5.5% yields risk cracking AI capex, US consumer

Man Group Plc Chief Market Strategist Kristina Hooper warned that surging long-end Treasury yields threaten to topple the two pillars propping up US economic growth: AI capital expenditures and consumer spending.

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“Something has to give,” Hooper said Monday in a Bloomberg Television interview as the selloff in government bonds sent yields higher across the curve.

Yields are at multiyear highs, including 30-year Treasuries approaching 5.6% and the 10-year skyrocketing more than 100 basis points this year and topping 5.25% on Monday. “We could easily get to 5.5% before year end,” Hooper said.

These elevated borrowing costs are potential trouble for the boom in artificial intelligence spending and for consumers’ pocketbooks, Hooper said. Costlier debt raises the threshold for generating returns on AI investment, and that hurdle was already “quite high,” Hooper said. Meanwhile, the yield on 10-year Treasury is “so closely correlated” with mortgage rates and consumer credit, she added. 

She rejected the thesis that rising yields simply reflect strong economic data, saying that inflation, fiscal sustainability concerns and the US deficit-to-GDP ratio are the real drivers behind the Treasury rout. And even if yields are rising for defensible reasons, she said, traders have never faced the current set of challenges.

“What is abnormal is how dramatically fast yields have gone up on the long end,” Hooper said. “Also what’s a historical anomaly is how high our government debt load is.” 

Her warning landed ahead of a week packed with key reports that may add evidence to a picture of a strengthening economy, which would keep pressure on Federal Reserve policymakers to follow up on this month’s interest rate hike. Economists expect Friday’s payrolls report to show that employers added about 90,000 workers in September and unemployment remained at 4.1%.

Hooper added a new metaphor to the discussion of the so-called K-shaped economy, so named because of the divergence between the upper and lower ends of the income spectrum. Her analogy: a “P-shaped” economy, based on the concentration of net worth at the top of the scale.

Stocks’ rise to records this year created a wealth effect helping buoy consumer spending, she said, which adds to the risk in an equity selloff.

“That could be quite problematic for consumer spending because so much of the consumer spending has been coming from that top part of the P,” she said.

(This story was produced with the assistance of Bloomberg Automation.)