The Daily Spark

The number of publicly listed companies keeps declining, and there are now more ways to trade the market than there are stocks in the market, see chart below.

Front-end rates are under upward pressure because inflation is higher for longer.

The belly of the curve is seeing upward pressure on yields because of hyperscaler issuance.

And long-end rates are moving higher because of more Treasury supply and less Fed demand.

The bottom line is that three distinct forces are pushing rates higher across the curve, and investors should position for a persistently higher rate environment.

Chips go into virtually everything manufactured, including cars, appliances, industrial equipment and phones. When manufacturers plan to ramp up production, they order semiconductors first, often 6-12 months in advance due to long lead times. Chip demand therefore anticipates broader manufacturing demand.

Locked-in mortgage rates are keeping homeowners in place and driving a surge in renovation spending, see chart below.

The S&P 500 IT sector's share of total index capex has surged to a record-high 35%, as hyperscalers race to build out AI infrastructure at unprecedented scale, see chart below.

Transit ridership in NYC and London has stabilized at roughly 80% of pre-pandemic levels, as hybrid and remote work have permanently reshaped how often people ride the rails, see charts below.

Over the past 10 years, 100% of active managers in Treasury fixed-income funds have underperformed their benchmark. For active managers in public investment-grade credit, the share is 78%, and for active managers in public high yield, the share is 87%.

In fact, the data below from S&P shows that over the past decade, active managers in public fixed income have underperformed their benchmarks across all strategies, see chart below.

When the Fed began hiking rates aggressively in early 2022, the cost of capital for leveraged borrowers rose sharply and reshaped how corporate finance gets done. All-in coupons on floating-rate syndicated paper jumped from roughly 4% to 10%, crushing LBO economics and forcing sponsors to rethink deal structures that had been underwritten on the assumption of cheap debt. With higher rates also compressing CLO equity arbitrage, new CLO issuance slowed and the dominant buyer of syndicated paper stepped back from the market.

Direct lenders filled the gap, deploying record private credit dry powder while offering sponsors what the syndicated market couldn't: speed of execution, flexible bespoke structures (tailored amortization schedules, delayed-draw facilities) and the confidentiality of negotiating with a single lender rather than syndicating terms to the broader market.

What began as an equity market phenomenon has become a capital markets-wide transformation, see chart below. AI now accounts for nearly half of all IG issuance, 87% of VC funding and a growing share of HY, underscoring how deeply the AI investment cycle has penetrated every corner of finance.

The chart below shows that G7 government bond yields have surged to their highest levels in more than 20 years, driven by:

1) renewed inflationary pressure from elevated energy prices as the Middle East conflict disrupts global oil supply,

2) persistently large government deficits requiring ever-increasing bond issuance,

3) the end of central bank quantitative easing with the Fed balance sheet potentially shrinking, and

4) investors demanding higher term premiums and inflation premiums amid deglobalization and increased geopolitical fragmentation.

With no clear resolution in sight on any of these fronts, the era of artificially suppressed yields appears firmly behind us.

In short, rates will stay higher for longer, and investors should plan accordingly.