On August 12, Zhang Gang sold US $6 million of 10-year US treasury bond bonds and instead subscribed for the 10-year senior unsecured bonds just issued by AMD (Chaowei Semiconductor). I didn't hesitate to make this decision to adjust the warehouse, "Zhang Gang told the Economic Observer reporter.

As a multi strategy hedge fund manager managing over $300 million on Wall Street, he said his investment responsibility is to maximize returns. When he saw that the annualized interest rate of the 10-year bonds to be issued by AMD reached 5.5%, he resolutely abandoned the treasury bond bonds of the same period with an annualized yield of only 4.7%.

"Other Wall Street investment institutions are also withdrawing capital from the US treasury bond market and investing in US AI (artificial intelligence) corporate bonds. ”Zhang Gang stated that the reason why Wall Street capital is pursuing AI corporate bonds is not only due to the higher issuance interest rates of the latter, but also because AI companies have more "certainty" in their debt repayment ability.

Compared with the sustainability of US treasury bond bond cashing, which has caused financial market concerns, the explosive growth of AI industry has made the operating income of AI enterprises rise steadily, making Wall Street investment institutions think that AI enterprises have a more stable ability to repay capital and interest.

In late August, Zhang Gang went to a large asset management institution on Wall Street to investigate, and found that the proportion of AI corporate bonds in the bottom position of the latter's investment portfolio of more than $5 billion increased from 10% at the beginning of the year to 30% at present, while the proportion of US treasury bond bonds decreased from 70% at the beginning of the year to 50% at present.

The asset allocation director of this large asset management institution told Zhang Gang that their position adjustment range was not large on Wall Street, and some asset management institutions had changed half of their portfolio bottom positions from US treasury bond bonds to AI corporate bonds.

The new flow of Wall Street funds has attracted the attention of the US financial regulatory authorities.

Alberto Mussalem, chairman of the St. Louis Federal Reserve, said that there was a capital battle between AI corporate bonds and US treasury bond bonds.

Vivek Paul, investment strategist at BlackRock Investment Group, admitted that with AI companies increasing their bond issuance efforts in recent times, this capital battle is accelerating, directly reflected in the rise of bond yields.

Currently, Wall Street capital is waiting for both parties to compete for higher bond issuance rates. "Since late August, if the interest rate of long-term bonds issued by AI enterprises is lower than 6%, and the interest rate of long-term U.S. treasury bond bonds issued is lower than 4.7%, it will be difficult to arouse the subscription interest of Wall Street. ”Zhang Gang said.

Faced with the rising yield of US treasury bond bonds caused by the capital battle, Zhu Ming began to worry that if this trend continues to evolve, the US financial market will face a big storm. Zhu Ming is the investment director of a Wall Street multi strategy fund that manages over $600 million.

Recently, several Wall Street fund managers took the initiative to talk with Zhu Ming about the new risks being encountered in the US financial market: once the yield of US treasury bond bonds continues to rise (the price keeps falling), global capital loses confidence in US treasury bond and keeps away from the US financial market, the sharp adjustment of US dollar asset prices caused by this will inevitably trigger a new round of financial market turmoil.

Financial Relocation

Before switching to AI corporate bonds, Zhang Gang inquired with securities brokers about the latest trend of capital adjustments on Wall Street.

A securities broker told Zhang Gang that since July, the daily average size of various funds on Wall Street flowing from the U.S. treasury bond bond market to AI corporate bonds has reached more than 800 million dollars. The reason is that, first, the average interest rate of AI corporate bonds was 89 basis points higher than that of US treasury bond bonds in the same period, and second, Wall Street capital was unable to obtain stable additional returns from the basis trade of US treasury bond bonds, which further weakened the attractiveness of US treasury bond allocation.

The so-called treasury bond bond basis trading is mainly a strategy of arbitrage by using the small price difference between the spot and futures of treasury bond, that is, when funds buy treasury bond, they establish short contracts in treasury bond futures to lock the price difference between the two.

Through high leverage operations, the size of treasury bond bond basis transactions on Wall Street exceeded trillion US dollars, becoming a major source for Wall Street to win additional income from US treasury bond investment.

Zhang Gang revealed that in the past, he could obtain an additional 1.5% arbitrage yield every year through the basis trade of US treasury bond bonds with 10 times of capital leverage. In addition to the interest income of about 4.5% from holding the maturity strategy of 10-year US treasury bond, the comprehensive yield of his US treasury bond investment strategy reached 6%.

"Whether the treasury bond bond basis transaction can continue to obtain stable returns depends largely on the transparency of the Federal Reserve's monetary policy, which enables the financial market to evaluate treasury bond in advance and control the price fluctuation of treasury bond in a relatively low range." Zhang Gang said. Under the influence of the new chairman of the Federal Reserve, Walsh, who continues to weaken the forward-looking guidance of monetary policy, the current divergence between Wall Street and the Federal Reserve's interest rate policy has increased, which has led to increased fluctuations in the spot price of US treasury bond bonds, making the stability of the yield of US treasury bond basis transactions suffer a significant impact.

Since late July, influenced by the unexpected drop in spot prices of US treasury bond bonds (bond yields rebounded), Zhang Gang's US treasury bond basis transaction has suffered a loss of 0.2 percentage points, resulting in the comprehensive yield of US treasury bond bonds held to maturity+basis transaction starting to be lower than that of AI corporate bonds.

As a result, he decided to sell US $6 million of 10-year US treasury bond bonds in August and invest in AMD's newly issued corporate bonds instead.

"With the continuous expansion of the bond issuance scale of AI enterprises, if the bond issuance interest rate further rises, I will move more funds from the US treasury bond bonds. ”Zhang Gang said.

According to data from Dealogic, a global financial data provider, as of August 15th, six large AI companies in the United States - Alphabet (parent company of Google), Amazon, Meta (metaverse), Oracle, Nvidia, and SpaceX (space exploration technology company) - issued bonds worth $244 billion this year, far exceeding last year's total of $108 billion. The market expects that with the continuous increase in investment and construction of AI data centers, the bond issuance scale of these six large AI companies will exceed 400 billion US dollars by 2027.

In August, Nvidia reached a cooperation agreement with several large investment institutions such as Apollo, BlackRock, Blackstone, Goldman Sachs, etc., intending to raise over $500 billion in funds for AI infrastructure construction.

Zhang Gang revealed that another driving force behind his increased allocation of AI corporate bonds is that AI companies are now scrambling to raise bond issuance rates in order to compete for more subscription funds, creating higher bond investment returns for Wall Street.

On August 7th, Alphabet issued $25 billion in investment grade bonds. In order to realize oversubscription, Al phabet set the annualized interest rate for the issuance of 40 year corporate bonds at 6.5%, 130 basis points higher than the yield of US treasury bond bonds in the same period. In order to snap up Alphabet's long-term bonds, Wall Street investment institutions sold long-term US treasury bond bonds, causing the yield of 10-year US treasury bond bonds to jump about 4 basis points that day.

Faced with such high bond issuance rates, large AI companies in the United States remain quite calm.

In recent years, the AI industry has continued to experience explosive growth, with the annual revenue growth rate of large AI companies generally exceeding 30%. In addition, Wall Street investment banks are competing to provide them with refinancing financial services, making these companies "believe" that they have sufficient funds to complete bond principal and interest payments.

Moreover, these large AI companies are well aware that their bond issuance scale can easily reach billions of dollars. If they do not raise the issuance interest rate to over 6%, it will be difficult to attract so much subscription funds.

In Zhang Gang's view, as AI enterprises continue to raise the bond issuing interest rate, the US treasury bond bonds are in a losing position in the battle for funds.

Affected by the continuous departure of capital, the yield of 30-year US treasury bond bonds reached 5.34% on August 18, the highest since 2007.

"In the past, when the yield of US treasury bond bonds hit a new high, Wall Street capital would rush to buy and get higher yields. But now, people have lost sight of the yield of US treasury bond, because they know that AI corporate bonds with higher yields will soon come. ”Zhang Gang said.

God's Assist

In the face of the "fall out of favor" of US treasury bond bonds and the continuous rise in yields, the US Treasury Department "cannot sit still".

On August 19, the US Treasury Department decided to increase the single repurchase scale of long-term US treasury bond from US $2 billion to more than US $4 billion from September.

Zhang Gang believes that the main purpose of this move is to reduce the financing cost of debt issuance by lowering the yield of long-term US treasury bond bonds.

According to the data, influenced by the continuous expansion of the scale of US treasury bond bonds, the interest expenditure on US treasury bond bonds in the past 10 months has reached about 930 billion US dollars, becoming the second largest expenditure item after social security and medical care. After the size of the US debt exceeded 40 trillion US dollars in August, even a slight rise in the bond issuance interest rate will bring a huge amount of interest expenditure "snowball" effect to the US finance.

On August 19, affected by the above measures of the US Treasury Department, the yield of 10-year US treasury bond bonds once fell back to 4.64%. Since then, the yield of the 10-year US treasury bond bond has always hovered between 4.64% and 4.7%. As of August 28, the yield of 10-year US treasury bond bonds hovered around 4.67%.

The key reason why the measures of the US Treasury Department failed to significantly reduce the yield of 10-year US treasury bond bonds is that the bond repurchase efforts were not enough to offset the selling pressure caused by the withdrawal of Wall Street funds from US bonds.

Since the middle of August, the daily flow of Wall Street funds from US treasury bond bonds to AI corporate bonds once exceeded US $1 billion. The US Treasury Department's new US $2 billion treasury bond repurchase effort can only hedge the amount of capital loss for two days, which is difficult to reverse the decline in the price of US treasury bond bonds.

On August 24, Wall Street began to hear that the US Treasury Department was considering using funds from the general account (TGA account) to increase the repurchase of treasury bond bonds.

However, this move will actually "scare away" more Wall Street capital.

Zhang Gang learned from the securities broker that in the week of August 24, many family offices and investment institutions affiliated to sovereign investment funds also joined the camp of selling US treasury bond bonds and transferred their funds to AI corporate bonds. They believe that the US Treasury is determined to increase bond repurchase efforts to lower the yield of US treasury bond bonds, which is further expanding the spread advantage of AI corporate bonds over US treasury bond, and highlighting the investment value of the former.

Faced with the "divine assistance" of the US Treasury Department, not all Wall Street capital has chosen to take the opportunity to increase investment in AI corporate bonds.

Zhang Gang revealed that some Wall Street funds have chosen to close when the market is good and started selling AI corporate bonds at high prices to take profits.

Broadcom, a large semiconductor and infrastructure software company in the United States, has issued a bond with a coupon rate of 5.15% and a maturity date of 2031. The yield of this bond has risen by about 14 basis points in the past month, due to concerns from some Wall Street capital that if AI applications fall short of expectations and the growth rate of computing power demand slows down in the future, AI companies will face the risk of bond redemption default if they encounter a slowdown in revenue growth. However, currently Wall Street investment institutions that choose profit taking are in the minority, "Zhang Gang said. Most Wall Street investment firms have long been prepared - either by buying credit default swap (CDS) contracts to hedge against bond default risks, or by reducing the investment duration of AI corporate bonds to avoid long-term allocation risks. Specifically, Wall Street investment institutions are focusing on increasing the subscription of short-term AI corporate bonds with a maturity of less than 3 years, and correspondingly reducing the allocation of AI corporate bonds with a maturity of more than 5 years.

Zhang Gang chose the previous risk hedging measure. In July, Zhang Gang bought CDS contracts for related bonds while building a position in the 5-year corporate bonds of Broadcom. Since August, the CDS price of this bond has risen by over 28 basis points, which is enough to offset the losses caused by the decline in bond prices.

Risk Avoidance Action

In the past two weeks, Zhu Ming has allocated 15% of his multi strategy product funds to buy COMEX gold futures and gold ETFs (exchange traded open-end index funds) at the gold price of $4550 per ounce.

He said, 'We are on the brink of a financial storm and need to increase our holdings in gold as a safe haven.' He made this decision to adjust his holdings without any hesitation.

In his view, the financial market is facing two major risks: first, the ongoing capital battle is causing various bond yields in the United States to rise and bond prices to continuously decline. This has reduced the confidence of global capital in the investment in the US bond market, which has led to the departure of large-scale funds. Second, in the face of the US debt scale exceeding 40 trillion US dollars, the relevant US departments are trying to reduce the yield of treasury bond bonds by increasing the repurchase of treasury bond. Investors are therefore more worried about the erosion of the real value of the US dollar and US treasury bond bonds. This has exposed US treasury bond bonds and the US dollar to the risk of a sharper decline than expected, which may shake the investment security of the US financial market.

In the past month, some Wall Street capital chose to increase their positions in gold to avoid risks, as AI corporate bonds and US treasury bond bonds "scrambled for money" and US treasury bond bond yields rose steadily.

According to data released by the US Commodity Futures Trading Commission (CFTC), in the four weeks ending August 21, managed funds (hedge funds registered with the US Securities and Exchange Commission), other types of funds (funds not registered with the SEC), and non reporting funds (speculative capital) collectively purchased a net long position in COMEX gold futures worth $22.2 billion.

Jonathan Garber, an analyst at UBS, said that after the US Treasury Department decided to increase the repurchase amount of US treasury bond bonds on August 19, more buying emerged in the gold market. This highlights that the capital battle between AI corporate bonds and US treasury bond bonds is becoming fiercer, which makes Wall Street capital foresee that relevant US departments will take more vigorous measures to affect the pricing and yield trend of long-term US treasury bond, and is worried that this will lead to a decline in the credibility of the US dollar and US treasury bond, so it strengthens the demand for safe haven allocation of gold.

Zhang Gang also felt that this capital battle is dragging the US financial market into new uncertainty risks.

On August 19th, he attended a gathering of hedge fund managers on Wall Street. More than 80% of fund managers attending the meeting believed that the biggest victims of this capital battle were the US dollar, the credit of US treasury bond bonds and the stability of the US financial market. In particular, if the US Treasury Department tries to continue to intervene and affect the yield of 10-year US treasury bond bonds through the "institutionalization" of long-term bond repo, the global financial asset pricing benchmark and pricing logic will change dramatically, which will have a major impact on the stability of the financial market and the credit of the US dollar and US treasury bond bonds.

Starting from the second half of August, he allocated approximately 10% of his funds from multi strategy products and established a position in Bitcoin around $77000.

He revealed to reporters that choosing Bitcoin as a safe haven is also a consensus among many Wall Street fund managers.

Data shows that during the week of August 21st, 13 Bitcoin ETFs listed in the United States achieved a net inflow of $1.92 billion, setting a record for the highest weekly net inflow since October last year. Affected by this, Bitcoin once reached the integer level of $80000, with a cumulative increase of about 26% since August.

Ding Yuan, the president of New Fire Research Institute, analyzed to the reporter that the reason why Wall Street capital chose to use Bitcoin as a hedge investment was that, first, the rising yield of US treasury bond bonds caused by the capital battle was in marked contradiction with the US Treasury Department's attempt to lower the yield of US treasury bond bonds, which might evolve into a crisis of US treasury bond bonds' credit damage, triggering a large amount of capital to flow to non sovereign hedge assets such as Bitcoin; The second is the proactive intervention of the US Treasury Department, which is triggering a depreciation of the US dollar, benefiting Bitcoin denominated in US dollars. "Both gold and Bitcoin are pressure relief valves for Wall Street capital to resist treasury bond bonds and dollar credit losses," he pointed out.

As of August 28th, the prices of gold and Bitcoin are hovering around $4630 per ounce and $80834 per ounce, respectively. Faced with the positive returns generated by safe haven investments, neither Zhu Ming nor Zhang Gang chose to settle for safety.

They admitted that no one knows what will happen in September. Before the capital battle between AI corporate bonds and US treasury bond bonds cools down, they need to keep the proportion of safe haven asset allocation above 10% to cope with potential financial market storms.

(At the request of the interviewee, Zhu Ming is a pseudonym)

(Author Chen Zhi)