Man Group has issued a warning that increasing bond yields, especially the 5.5% on 30-year Treasuries, pose a significant threat to the booming AI sector and the already strained US consumer. The firm highlights that AI-linked bond sales are at record highs, leading to mounting "bubble risks." This elevated borrowing cost could impact the massive capital expenditures required for AI infrastructure, including chips, data centers, and the associated energy and water infrastructure. Historically, rising bond yields make equity investments, particularly in high-growth tech sectors, less appealing, as "risk-free" bonds offer competitive returns.
The investment management firm is particularly concerned about the vulnerability of credit markets tied to AI. They note that public credit investors face an "uncomfortable asymmetry," being exposed to execution delays and rising capital needs without the same upside potential as equity investors. Man Group advises against completely avoiding AI credit but stresses the need for stricter credit selection, focusing on stronger borrowers, better diversification, and markets less dependent on the perfect execution of AI buildouts. They are especially cautious about high-yield bonds and leveraged loans in the AI and hyperscaler space, as many borrowers are still free-cash-flow negative, relying heavily on external funding.
Beyond AI, Man Group points to a fragile US consumer as a significant risk. Despite the focus on AI, household spending accounts for two-thirds of US GDP. Recent data indicates the US consumer is "cracking" under the pressure of higher energy prices, depleted savings, and rising costs, with the personal savings rate falling to 2.6% in April, the lowest since 2008. The firm notes a K-shaped economy where the top 10% of households, holding roughly 90% of US equity holdings, drive a disproportionate share of consumer spending (35% to 50%). If the AI bubble bursts, the 90% of mass-market consumers, who are already utilizing credit proportionally highly, are in no position to support the economy, leaving the system with little resilience. According to Sriram Reddy, head of client portfolio management at Man Group, the "mispricing of risk is coiling a spring," suggesting that growing enthusiasm now could lead to a more violent correction later.
