Wolfe warns AI spending may face pressure from rising yields

Investing.com -- Stocks fell last week as long-term interest rates showed volatility amid concerns about U.S. government debt and deficits, according to Wolfe Research. The U.S. 2-year yield rose 6 basis points, the 10-year yield increased 4 basis points, and the 30-year yield added 1 basis point.

Wolfe attributed the jump in yields since late June primarily to a new and untested Federal Reserve Chair, with investors demanding a higher term premium to hold longer-term bonds.

The firm expects continued rate and equity volatility this week with several key events scheduled. Nvidia (NASDAQ: NVDA) will report results after the close on Wednesday, the July PCE inflation report is due Wednesday, and Fed Chair Kevin Warsh will speak at the Kansas City Fed's Jackson Hole Economic Policy Symposium on Friday.

The Treasury announced two actions in recent weeks, including USD-JPY currency intervention and an expanded buyback program last week. Wolfe believes markets are underestimating these measures as potential support for risk assets and rate-sensitive equities.

Wolfe stated that U.S. federal debt is on an unsustainable long-term trajectory. The firm said it is in policymakers' best interest to keep long-term interest rates low given the increasing reliance of hyperscalers on fixed income markets to fund AI capital spending, record high U.S. government debt, and deficit levels similar to last year.

The firm provided a "High Leverage" stock screen, defining the metric as high net debt to EBITDA, either in the top quintile by sector or above 3.5 times with 30% upcoming maturity. These companies are likely to face pressure if long rates continue rising, Wolfe said.

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