AI giants are competing for capital with the U.S. government, and Bitcoin and gold have become "safe havens"

On August 12, Zhang Gang sold off $6 million worth of 10-year U.S. Treasury bonds and subscribed to the newly issued 10-year senior unsecured bonds of AMD (Advanced Micro Devices). "I did not hesitate at all when making this position adjustment decision," Zhang Gang told a reporter from *The Economic Observer*.

As a Wall Street multi-strategy hedge fund manager overseeing more than $300 million in assets, he said his investment responsibility is to maximize returns. When he saw that the annualized interest rate of AMD's proposed 10-year bonds reached 5.5%, he decisively abandoned the U.S. Treasury bonds of the same period with an annualized rate of return of only 4.7%.

"Other Wall Street investment institutions are also withdrawing capital from the U.S. Treasury market and shifting to U.S. AI (Artificial Intelligence) corporate bonds," Zhang Gang said. The reason why Wall Street capital is chasing AI corporate bonds is not only the higher issuance rate of the latter, but also the greater "certainty" of the debt repayment capacity of AI enterprises.

Compared with the sustainability of U.S. Treasury bond redemption that has raised concerns in the financial market, the explosive growth of the AI industry has pushed the operating revenue of AI enterprises to rise steadily, leading Wall Street investment institutions to believe that AI enterprises have a more robust capacity to repay principal and interest.

In late August, Zhang Gang went to a large Wall Street asset management institution for research, and found that among the institution's investment portfolio base positions of more than $5 billion, the proportion of AI corporate bonds rose from 10% at the beginning of the year to 30% at present, while the proportion of U.S. Treasury bonds dropped from 70% at the beginning of the year to 50% at present.

The director of asset allocation of this large asset management institution told Zhang Gang that their position adjustment range is not large on Wall Street, and some asset management institutions have replaced half of their investment portfolio base positions from U.S. Treasury bonds with AI corporate bonds.

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

Alberto Musalem, President of the Federal Reserve Bank of St. Louis, said that a competition for capital is taking place between AI corporate bonds and U.S. Treasury bonds.

Vivek Paul, an investment strategist at BlackRock Investment Group, admitted that as AI enterprises have increased their bond issuance efforts recently, this capital competition is evolving at an accelerated pace, which is directly reflected in the rise of bond yields.

At present, Wall Street capital is waiting for both sides to offer higher bond issuance interest rates. "Since late August, if the issuance rate of long-term bonds of AI enterprises is lower than 6%, and the issuance rate of long-term U.S. Treasury bonds is lower than 4.7%, it will be difficult to arouse the subscription interest of Wall Street," Zhang Gang said.

Faced with the rise in U.S. Treasury yields caused by this capital competition, Zhu Ming began to worry that if this trend is allowed to continue, the U.S. financial market will face a major storm. Zhu Ming is the investment director of a Wall Street multi-strategy fund that manages more than $600 million.

Recently, many Wall Street fund managers took the initiative to talk to Zhu Ming about the new risks the U.S. financial market is encountering: once the continuous rise in U.S. Treasury yields (with prices falling continuously) leads global capital to lose confidence in U.S. Treasury investment and stay away from the U.S. financial market one after another, the resulting drastic adjustment of dollar asset prices will inevitably trigger a new round of financial market turmoil.

Capital "Relocation"

Before shifting to AI corporate bonds, Zhang Gang consulted securities brokers about the latest trend of Wall Street capital position adjustment.

A securities broker told Zhang Gang that since July, the average daily scale of various Wall Street funds flowing from the U.S. Treasury market to AI corporate bonds has reached more than $800 million. The reasons are as follows: first, the average issuance rate of AI corporate bonds is 89 basis points higher than that of U.S. Treasury bonds of the same period; second, Wall Street capital cannot obtain stable additional returns from U.S. Treasury basis trade, which further weakens the attractiveness of U.S. Treasury allocation.

The so-called U.S. Treasury basis trade is mainly an arbitrage strategy that uses the tiny price difference between U.S. Treasury spots and futures, that is, funds buy U.S. Treasury bonds while opening short positions in U.S. Treasury bond futures to lock in the price difference between the two.

Through high-leverage operations, the scale of U.S. Treasury basis trade on Wall Street has exceeded one trillion U.S. dollars, becoming a major source for Wall Street to earn additional returns on U.S. Treasury investment.

Zhang Gang revealed that in the past, through the 10-times leverage U.S. Treasury basis trade, he could obtain an additional arbitrage return of 1.5% every year. Coupled with the interest income of about 4.5% obtained from the strategy of holding 10-year U.S. Treasury bonds to maturity, the comprehensive rate of return of his U.S. Treasury investment strategy reached 6%.

"Whether U.S. Treasury basis trade can continue to obtain stable returns largely depends on the transparency of the Federal Reserve's monetary policy, so that the financial market can price U.S. Treasury bonds in advance and keep the price fluctuation of U.S. Treasury bonds in a relatively low range," Zhang Gang said. Affected by the continuous weakening of monetary policy forward guidance by the new Fed Chair Kevin Warsh, the current divergence on Wall Street over the Fed's interest rate policy has widened, resulting in increased price volatility of U.S. Treasury spots, which has significantly impacted the return stability of U.S. Treasury basis trade.

Since late July, affected by the unexpected drop in U.S. Treasury spot prices (bond yields rebounded), Zhang Gang's U.S. Treasury basis trade has suffered a loss of 0.2 percentage points, leading the comprehensive return of the strategy of holding U.S. Treasury bonds to maturity plus basis trade to be lower than the interest rate of AI corporate bonds.

Therefore, he decisively sold $6 million worth of 10-year U.S. Treasury bonds in August and invested in the new corporate bonds issued by AMD.

"As the scale of AI enterprises' bond issuance continues to expand, if their bond issuance rate rises further, I will move more funds from U.S. Treasury bonds to them," Zhang Gang said.

Data from Dealogic, a global financial data provider, shows that as of August 15, six large U.S. AI enterprises — Alphabet (Google's parent company), Amazon, Meta, Oracle, NVIDIA, and SpaceX (Space Exploration Technologies Corp.) — have raised a total of $244 billion through bond issuance this year, far higher than the $108 billion for the whole of last year. 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 enterprises will exceed $400 billion in 2027.

In August, NVIDIA reached cooperation with a number of large investment institutions such as Apollo, BlackRock, Blackstone and Goldman Sachs, planning to raise more than $500 billion in funds for AI infrastructure construction.

Zhang Gang revealed that another driving force for him to increase the allocation of AI corporate bonds is that nowadays, in order to compete for more subscription funds, AI enterprises are scrambling to raise bond issuance rates, creating higher bond investment returns for Wall Street.

On August 7, Alphabet issued $25 billion worth of investment-grade bonds. To achieve over-subscription, Alphabet set the annualized issuance rate of 40-year corporate bonds at 6.5%, 130 basis points higher than the yield of U.S. Treasury bonds of the same period. In order to snap up Alphabet's long-term bonds, Wall Street investment institutions sold long-term U.S. Treasury bonds, causing the yield of 10-year U.S. Treasury bonds to jump by about 4 basis points on that day.

Faced with such a high bond issuance rate, large U.S. AI enterprises are quite calm.

In recent years, the AI industry has continued to grow explosively, and the annual operating revenue growth rate of large AI enterprises has generally exceeded 30%. In addition, Wall Street investment banks are scrambling to provide refinancing financial services for them, making these enterprises "believe" that they have sufficient funds to complete the principal and interest repayment of bonds.

Besides, these large AI enterprises are well aware that their bond issuance scale often reaches tens of billions of U.S. dollars. If they do not raise the issuance rate to more than 6%, it will be difficult to attract such a large amount of subscription funds.

In Zhang Gang's view, as AI enterprises continue to raise bond issuance rates, U.S. Treasury bonds are at a disadvantage in this capital competition.

Affected by the continuous exit of capital, the yield of 30-year U.S. Treasury bonds reached 5.34% on August 18, the highest value since 2007.

"In the past, whenever U.S. Treasury yields hit new highs, Wall Street capital would scramble to buy them and earn higher returns. But now, people no longer value U.S. Treasury yields, because they know that AI corporate bonds with higher yields will come soon," Zhang Gang said.

"Magic Assist"

Faced with the "disfavor" of U.S. Treasury bonds and the continuous rise in yields, the U.S. Department of the Treasury "could not sit still".

On August 19, the U.S. Department of the Treasury decided to increase the single repurchase scale of long-term U.S. Treasury bonds from $2 billion to more than $4 billion starting from September.

Zhang Gang believes that the main intention of this move is to reduce the issuance and financing cost of its own bonds by suppressing the yield of long-term U.S. Treasury bonds.

Data shows that affected by the continuous expansion of the U.S. Treasury scale, the U.S. government's interest expenditure on Treasury bonds in the past 10 months has reached about $930 billion, becoming the second largest expenditure item only after social security and medical care. After the U.S. debt scale exceeded $40 trillion in August, even a slight rise in the bond issuance rate will bring a huge "snowball effect" of interest expenditure to the U.S. finance.

On August 19, affected by the above measures of the U.S. Department of the Treasury, the yield of 10-year U.S. Treasury bonds once corrected to 4.64%. After that, the yield of 10-year U.S. Treasury bonds hovered between 4.64% and 4.7%. As of August 28, the yield of 10-year U.S. Treasury bonds hovered around 4.67%.

The key reason why the measures of the U.S. Department of the Treasury failed to significantly reduce the yield of 10-year U.S. Treasury bonds is that the bond repurchase intensity is not enough to offset the selling pressure brought by Wall Street funds withdrawing from U.S. Treasuries.

Since mid-August, the amount of Wall Street funds flowing from U.S. Treasury bonds to AI corporate bonds has once exceeded $1 billion per day. The additional $2 billion Treasury repurchase intensity of the U.S. Department of the Treasury can only hedge the capital outflow of two days, and it is difficult to reverse the falling trend of U.S. Treasury prices.

On August 24, rumors spread on Wall Street that the U.S. Department of the Treasury was considering using funds from the General Account (TGA account) to increase the intensity of Treasury repurchase.

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

Zhang Gang learned from securities brokers that in the week of August 24, a number of family offices and investment institutions under sovereign wealth funds also joined the camp of selling U.S. Treasury bonds and shifted their funds to AI corporate bonds. They believe that the U.S. Department of the Treasury's insistence on increasing bond repurchase to suppress U.S. Treasury yields is further expanding the spread advantage of AI corporate bonds over U.S. Treasury bonds, which further highlights the investment value of the former.

Faced with the "magic assist" from the U.S. Department of the Treasury, not all Wall Street capital chose to take the opportunity to increase their investment in AI corporate bonds.

Zhang Gang revealed that some Wall Street funds have chosen to stop in time and began to sell AI corporate bonds at high prices to take profits.

Broadcom, a large U.S. semiconductor and infrastructure software company, issued a bond with a coupon rate of 5.15% and maturing in 2031. The yield of this bond has risen by about 14 basis points in the past month. The reason is that part of Wall Street capital is worried that once the future AI application implementation falls short of expectations and the growth rate of computing power demand slows down, AI enterprises will face the risk of bond default if their operating revenue growth slows down. "However, the Wall Street investment institutions that choose to take profits at present are in the minority," Zhang Gang said. Most Wall Street investment institutions have taken precautions long ago — either buying Credit Default Swap (CDS) contracts to hedge the risk of bond redemption default, or 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 former risk hedging measure. In July, while building a position in Broadcom's 5-year corporate bonds, Zhang Gang also bought the CDS contracts of the relevant bonds. Since August, the CDS price of this bond has risen by more than 28 basis points, which is enough to offset the loss caused by the fall of the bond price.

Risk Aversion Actions

In the past two weeks, Zhu Ming took out 15% of the capital of his multi-strategy products and bought COMEX gold futures and gold ETFs (Exchange Traded Funds) at the gold price of $4550 per ounce.

He said, "We are on the edge of a financial storm, and we need to increase our position in gold to avoid risks." He made this position adjustment decision without any hesitation.

In his view, the financial market is facing two major risks: first, the continuous heating up of capital competition pushes up the yields of various U.S. bonds, and bond prices keep falling. This reduces the confidence of global capital in the U.S. bond market, leading to large-scale capital outflow. Second, faced with the U.S. debt scale exceeding $40 trillion, the relevant U.S. authorities are trying to reduce Treasury yields by increasing the intensity of Treasury repurchase. Investors are therefore more worried that the actual value of the U.S. dollar and U.S. Treasury bonds will be eroded. This makes U.S. Treasury bonds and the U.S. dollar face the risk of unexpected sharp decline, which may shake the investment security of the U.S. financial market.

Over the past month, under the "money-grabbing" competition between AI corporate bonds and U.S. Treasury bonds and the continuous rise of U.S. Treasury yields, some Wall Street capital has chosen to increase their positions in gold to avoid risks.

Data released by the U.S. Commodity Futures Trading Commission (CFTC) shows that in the four weeks ending August 21, managed money (hedge funds registered with the U.S. Securities and Exchange Commission), other types of funds (funds not registered with the SEC) and non-reportable funds (speculative capital) collectively bought a net long position of $22.2 billion in COMEX gold futures.

Jonathan Garber, an analyst at UBS, said that after the U.S. Department of the Treasury decided to increase the amount of U.S. Treasury repurchase on August 19, more buying orders emerged in the gold market. This highlights that the capital competition between AI corporate bonds and U.S. Treasury bonds is becoming white-hot, making Wall Street capital feel that the relevant U.S. authorities will take more intensive measures to affect the pricing and yield trend of long-term U.S. Treasury bonds, and worry that this move will lead to the decline of the credit of the U.S. dollar and U.S. Treasury bonds, thus strengthening the demand for risk-averse allocation to gold.

Zhang Gang also feels that this capital competition is "dragging" the U.S. financial market into new uncertain risks.

On August 19, he attended a gathering of Wall Street hedge fund managers. More than 80% of the participating fund managers believed that the biggest victims of this capital competition are the U.S. dollar, the credit of U.S. Treasury bonds and the stability of the U.S. financial market. In particular, if the U.S. Department of the Treasury institutionalizes long-term bond repurchase and tries to continuously intervene and affect the yield of 10-year U.S. Treasury bonds, the pricing benchmark and pricing logic of global financial assets will change drastically, which will have a major impact on the stability of the financial market and the credit of the U.S. dollar and U.S. Treasury bonds.

Since late August, he has taken out about 10% of the capital of his multi-strategy products and built a position in Bitcoin at around $77,000.

He revealed to reporters that choosing Bitcoin for risk aversion is also a consensus among many Wall Street fund managers.

Data shows that in the week of August 21, 13 Bitcoin ETFs listed in the U.S. recorded a total net capital inflow of $1.92 billion, the highest single-week net capital inflow record since October last year. Affected by this, Bitcoin once stood above the $80,000 integer mark, and its cumulative increase since August has reached about 2