Global Rates & FX Views: Hyperscalers, credit, & rates

U.S. Credit Market & Hyperscaler Supply Dynamics

• Overall Market Strength: U.S. credit spreads remain near historically tight levels despite year-to-date supply exceeding 30% year-over-year, driven by attractive yield environments for Investment Grade (IG) investors.
  • July market weakness is isolated to hyperscaler-related credit, with the sector index widening approximately 4 basis points month-to-date.
  • The Amazon deal on July 7 priced roughly 20 basis points wider than secondary market levels, contrasting sharply with the typical 5 basis point new issue concession.
  • Average "AI-rated" bonds (including hyperscalers, SpaceX, and Nvidia) have widened 25 basis points in July, a move outsized compared to other IG sectors like banks (2–4 bps wider).
• Hyperscaler Issuance Outlook:
  • Year-to-date A.I.-related supply reached $271 billion across currencies ($209 billion in USD).
  • BofA Base Case: Anticipates an additional $50 billion in hyperscaler deals and $25 billion in data center supply through the end of 2026.
  • Investor Consensus: A recent survey of U.S. credit investors indicates an expectation of roughly $100 billion in additional hyperscale supply (approx. $67 billion in USD) for the remainder of 2026.
  • Key Risks: Issuance volume is highly uncertain due to hyperscalers raising capital primarily to bolster cash on balance sheets without providing specific guidance; future deal performance (subscription levels and pricing) remains the critical feedback loop.
• Issuer Behavior vs. Market Sensitivity:
  • Hyperscalers historically demonstrate low sensitivity to market conditions but recent Amazon pricing suggests this may be shifting; however, issuers have thus far charged ahead without slowing issuance due to spread widening.
  • Amazon's subscription level of 2.5x was unusually weak compared to the typical 3–4x oversubscription for large deals, signaling potential demand fatigue.

Fixed Income Market & Treasury Offsets

• Supply Offset Dynamic: A decline in U.S. Treasury coupon supply (due to a shift toward bills) is being almost exactly offset by rising IG issuance, neutralizing the net impact on total core bond supply digestible by investors.
  • This dynamic creates upside risks to rates, as any reduction in treasury duration risk is canceled out by increased credit supply demand from investment funds.
• Investor Positioning:
  • Large benchmark funds are maintaining neutral duration and curve risk while extending themselves in overweight IG spread exposure.
  • Rotation Potential: Significant room exists for real money investors to pivot under duration, favor curve flattening, and recalibrate IG exposure closer to benchmark levels if the Fed delivers anticipated hikes.
  • Macro Hedge Funds: Currently showing sympathy to the view that the Fed may deliver more rate hikes than current market pricing reflects.

Federal Reserve Outlook & Rate Expectations

• Market Pricing vs. Fed Guidance: The July FOMC meeting carries roughly 30–35% odds (approx. 8 basis points) of a hike, an unusual level of uncertainty given the Fed's typical guidance practices.
  • Historical Context: Post-Global Financial Crisis averages for FOMC surprise are around 2 basis points; notable exceptions include the June 2022 (75 bps) and September 2024 (50 bps cut) surprises, often preceded by pre-meeting leaks.
• Strategic Views on Hiking:
  • BofA Base Case: Prefers a Fed rate hike at the September meeting rather than July, citing weaker-than-anticipated inflation data in recent weeks.
  • Credibility Signal: A July hike would signal Fed Chair Powell's recommitment to inflation targets and tighter financial conditions, reclaiming credibility.
  • Forward-Looking Scenarios:
    • If Hiked in July: Markets could rapidly reprice to a baseline of 75 basis points of hikes through year-end or Q1 2026, flattening the yield curve.
    • Forward Guidance: A pivot to hiking is expected to involve a series of moves rather than a single "one-and-done" action, reversing the cuts delivered in the prior cycle.
    • Valuation Anchors: Real policy rates have eased over 100 basis points while unemployment fell; Taylor Rule implications suggest front-end rates should be significantly higher than current pricing.

Macro Context & Geopolitics

• Rate Drivers: Global rates are rising due to geopolitical tensions impacting commodities (oil, gasoline) alongside solid U.S. economic data.
  • U.K. initial jobless claims recently hit their lowest level since 1969.
• Earnings Watch: Upcoming earnings reports from major hyperscalers in the coming week will provide critical data points regarding future capex cycles and debt financing needs.