Earnings Call, Conference Presentation
Global Rates & FX Views: Hyperscalers, credit, & rates
- Market pricing currently assigns a 30% to 35% probability to a Federal Reserve rate hike at the July meeting, though the modal forecast anticipates the hike will occur at the September meeting due to weaker inflation data.
- Hyperscalers are expected to demand $100 billion in additional supply through the end of 2026, with a base case scenario projecting $50 billion in deals and $25 billion in data center supply, potentially expanding to a range of $50 billion to $70 billion if additional deals occur.
- Investors anticipate the potential for another couple of hyperscaler deals in the remainder of 2026, which could result in $67 billion of that total being denominated in U.S. dollars.
- A Fed hike is expected to trigger a pivot toward an underweight duration stance and a rotation into flatter yield curve positions, with front-end rates rapidly repricing to a baseline of 75 basis points in hikes by year-end or Q1 of the following year.
- Forward guidance suggests that any new hiking cycle will involve a series of rate increases intended to reverse prior cuts rather than a single event, aiming to reclaim inflation credibility and commit to tighter financial conditions.
- Upward pressure on the two-year rate and the overall yield curve is expected to drive selling in the front end, contributing to curve flattening, while larger real-money investors are anticipated to increase IG spread exposure to neutral levels.
- Significant supply uncertainty remains regarding hyperscalers' balance sheet cash targets, creating risks that they may continue issuing debt regardless of market conditions, potentially leading to wider spreads and negative market impacts.
- Recent market stress indicators include the Amazon deal pricing 20 basis points wider than previous levels, an unusually weak 2.5x subscription compared to the standard 3x to 4x, and expected earnings reports from hyperscalers within the next week to test market digestion.
- IG spreads are projected to remain neutral or become slightly wider as increased hyperscaler supply offsets the decline in Treasury coupon supply, with AI-rated bonds expected to trade approximately 25 basis points wider than other sectors like banks.
- August refunding data is expected to signal potential increases in Treasury coupon supply within the next week, while investors will closely monitor whether the Fed provides forward guidance or if political factors influence the timing of the rate decision.