The Daily Spark

Germany is hosting its Invest in Germany Summit this week, against the backdrop of rising investment needs in AI, infrastructure, defense and energy resilience.

Meeting these longer-term investment needs will require public and private capital across both credit and equity markets. And Germany starts with a relatively small pool of domestic institutional capital.

Germany has the least-funded pension system of any major advanced economy. Funded pension assets are only around 7% of GDP against 149% in Sweden and 185% in Canada. Furthermore, German occupational pension schemes allocate just 14% to equities, compared with 34% across the EU and around 50% in the US, see chart below.

Yet Germany has the highest household savings rate in Europe, with much of household wealth held in deposits.

This is why pension reform matters beyond retirement policy. The reforms now under way could ultimately generate around €90 billion of new annual funded pension flows, equivalent to roughly 2% of GDP.

The bottom line is that Germany is trying to increase investment at the same time as it builds a much larger domestic pool of long-term savings. Pension reform could help connect the two.

We look at the numbers, the reforms and the implications for capital markets in our new presentation on German pension reform, available here.

Written by Huw van Steenis

Duration measures how sensitive a bond’s price is to changes in interest rates, and for the 30-year Treasury, it has fallen from 25 years in 2020 to 14 today because of higher yields and higher coupons.

That means long Treasuries offer less cushion per dollar in a downturn.

As a result, investors may need to own more fixed income to hedge against the risk of a slowdown. Pairing Treasuries with high-quality credit can help.

Investment-grade private placements and infrastructure debt are often long-dated and fixed-rate, so they can carry meaningful duration, while asset-backed finance can add income, with duration varying by structure.

The bottom line is that when interest rates stay higher for longer, lower duration weakens the hedge that long Treasuries provide.

Let’s call the ongoing correction in AI assets "The AI Reset," where investors mark down their expectations for future cash flows.

What are the implications for the economy?

A sharp reset in AI expectations could undermine corporate confidence, trigger a pullback in capex and weigh on GDP growth, just as higher oil prices, tariffs and tighter immigration restrictions push inflation higher, raising the risk of a stagflationary environment in which growth slows even as price pressures persist.

Higher interest rates have not slowed the data center buildout. Over the past year, 10-year yields are up 125 bps, yet consensus forecasts for 2027 capex growth have only been revised higher, see chart below.

The reason is that many AI investors expect AI investments to return more than 10%, well above the 4% Fed funds rate. With borrowing costs far below expected returns, the AI spending boom is not sensitive to interest rates, and tighter policy is losing its bite on the economy.

The implication for investors is that upward pressure on rates persists until either the Fed raises rates above expected AI returns, or expected AI returns fall below the Fed funds rate. With the consensus still very bullish on AI, see chart again, investors should expect continued upward pressure on rates.

A Middle East deal after the midterm elections could push yields lower via lower oil prices. But the fundamental direction of travel for rates remains higher, especially with ongoing fiscal challenges and heavy Treasury issuance adding to the term premium.

The bottom line for both public and private markets is that higher for longer continues.

A new survey by Mavvrik and Benchmarkit of 396 enterprises finds that companies are adopting AI faster than they are building the financial controls to keep its costs in check.

Only 11% of firms forecast their AI spending within 10% of actual, down from 15% last year, see chart below.

The survey also shows that those misses are changing decisions, with 62% of firms saying an unexpected AI cost altered a business decision and one in four delaying or canceling an AI initiative.

The impact is showing up in profitability too, with 81% of companies reporting moderate-to-high gross margin impact from AI costs, including 63% who see a 6 to 15 percentage point decrease.

The bottom line is that we are still waiting for the ROI from AI investments, and this survey shows that while we wait, costs continue to surprise and become harder to predict and control.

For more see here and here.

US 10-year Treasury yields have risen by about 100 bps since the beginning of the year. A model developed by Fed economists D’Amico, Kim and Wei decomposes Treasury yields to show what is driving the move. Updated estimates released point to two main factors:

1. The expected path of real short rates has moved higher. The model estimates that the average real short rate expected over the next 10 years has increased. Lower oil prices or weaker growth could ease some of this pressure and help bring longer-term rates down.

2. The term premium has risen. The term premium is the additional yield investors demand to hold a long-dated bond beyond what the expected path of Fed policy would imply. It can therefore capture compensation for longer-term risks, including concerns around fiscal sustainability or Fed credibility.

The bottom line is that higher long rates this year reflect both the higher expected policy path from the Fed and investors asking for more compensation to hold duration.

Written by Allison Boxer

The US and Europe have fundamentally different roles in the AI economy. One is building it, and the other is using it. The US dominates on every supply-side measure: hyperscaler capex approaching $800 billion in 2026, data center capacity three times that of Europe and the dominant share of global AI models and semiconductor value, see the first three charts below.

Yet on adoption, several European countries are actually ahead of the US, and many European firms are using AI in their businesses (see the fourth and fifth charts). This suggests Europe is an eager user of infrastructure it did not build and cannot easily replicate.

The bottom line is that the US is the dominant AI builder, but both the US and Europe are AI adopters. For more, see our new chart book: The macro implications of the AI investment boom: US and Europe

Written by Huw van Steenis

The gap between the 90th- and 10th-percentile public core bond managers has narrowed from 1.5% a year in the 2010s to 1.1% since 2020, see the first and second charts below. Dispersion now spikes mainly in crises and quickly falls back.

This convergence comes on top of persistent underperformance by public fixed income managers. For example, data from S&P shows that over the past 10 years, the majority of active Treasury fund managers have underperformed their benchmarks, see the third chart below.

The bottom line is that with little difference between top and bottom managers in public fixed income, and almost all of them trailing their index, public core fixed income has become essentially a beta allocation for both institutions and households.

Here are five new interesting papers that are relevant for the ongoing conversation in markets.

1. Decoupling Direct Investment: American Firms' Retreat from China
   • The author documents evidence that US-China linkages are declining across channels. New project announcements and US acquisitions of Chinese companies are down, and American multinationals are shrinking their existing operations. Official statistics understate the extent of the retreat because of how much US investment is routed through Hong Kong.
2. The Early Impacts of AI on Employment among Recent College Graduates
   • Using CPS microdata, the authors analyze the effects of AI on recent college graduate unemployment through August 2026 to argue that AI is still not having a material impact on the US labor market. They find that summer 2026 unemployment trends for recent college graduates follow typical seasonal patterns, and no evidence of any significant displacement of recent college graduates. The authors do find some limited evidence of higher unemployment in telework-focused roles.
3. The Macroeconomic Effect of AI: Sizing the Software Engineering Channel
   • The authors use stock market returns and Revelio Labs data to estimate a market-implied expectation for AI productivity. Between November 2022 and December 2025, market expectations implied the equivalent of a permanent 32.6% increase in software engineering productivity, worth 3.6% of GDP. By mid-2026, amid rapid improvement in AI coding agents, the estimated effect had more than doubled. I am slightly skeptical how well this is capturing productivity versus some other kind of AI market factor, but I thought this was quite an interesting approach regardless.
4. Will AI Help or Hurt Work and the Economy? What People Around the World Expect
   • This paper summarizes the findings of a survey of more than 64,000 adults in 32 countries taken in April and May 2026. The surveys finds that workers are considerably more likely to expect AI to help their jobs than to threaten them, in contrast to the narrative in the US about AI-driven job displacement. Survey respondents who expect AI to help anticipate stronger growth and employment, while those who see it as a threat expect weaker employment and higher inflation.
5. Ratings, Debt, and Deficits: An Exploration
   • The authors compare a simple model of debt sustainability with actual sovereign credit ratings. They find that ratings agencies give far more weight to debt levels than projected fiscal balances, and they rely heavily on country-specific factors. As a result, countries with the same debt and fiscal outlook can receive very different ratings.

Written by Allison Boxer

AI's rate-insensitive boom is triggering "Dutch disease" in the US economy by draining capital, power and labor from vulnerable sectors like housing and autos.

Trapped between inflation driven by the AI boom and weakness in rate-sensitive industries, the Fed will have to keep interest rates higher for longer, see chart below.

Because monetary policy cannot resolve this sectoral imbalance, the only durable fix is expanding the supply of power, chips and infrastructure.

For more discussion, see also here.