RPT — ROI — Why governments might secretly wish for an AI stumble: Mike Dolan

(Repeats to additional subscribers without any changes. ) By Mike Dolan LONDON, Oct 14 (Reuters) — Whether AI proves to be a cure-all or an existential threat, the investment and financing frenzy around it is a headache on its own. Governments nursing stressed debt markets could be forgiven for secretly wishing for an AI stumble just to give them breathing space. That may be a classic case of "careful what you wish for," certainly if you believe this week's International Monetary Fund warnings about the disruption to markets and the global economy from any sudden correction in the hyper-concentrated AI bet.

But there were clear signs this week that even the slightest whiff of a problem in the AI space is bringing a bid back for government bonds, which now tempt investors with their highest yields in more than two decades. Troublesome domestic deficits and rancorous politics are at the core of bond market anxieties, of course. The energy price spike from the Iran war continues to compound the picture. Yet AI has considerably darkened the sovereign bond outlook over the past two years.

By lifting stock benchmarks, trade volumes and economic demand, the boom has stoked inflation pressures for central banks, flattered lacklustre gross domestic product numbers and competed directly with governments for fixed-income investment dollars. The flipside is that if the AI boom proves excessive or overhyped, there could be a stampede back to bonds because of economic and central banking implications, as well as a rush for havens from equity and credit market fallout. Hints of that are already in the air. Earlier this week, a severe shakeout in AI-linked global chipmakers rippled through AI stocks more broadly.

" South Korean giants Samsung and SK Hynix each plunged almost 10% on Tuesday. The wobble, coming just ahead of another critical quarterly earnings season for hyperscalers and global chip firms alike, immediately dragged US Treasury and global government bond yields lower. But as the final quarter of the year unfolds, some of the world's biggest investment funds are already beginning to turn. The world's biggest asset manager, BlackRock, said late Monday that it had reduced its US stocks recommendation from overweight to neutral for the first time in more than six months because of the risk of AI volatility ahead.

It simultaneously upgraded Treasuries to lock in income at these lofty yields, with a bias to short-dated paper. Not Worth Waiting For Peak Rates? In a note, BlackRock Investment Institute head Jean Boivin, chief strategist Wei Li and fixed-income chief investment officer Rick Rieder — once tipped for Federal Reserve chair last year — said the rationale for the shift was AI risk and what they saw as excessive expectations for Fed rate hikes. Even though they qualified the move as "managing near-term risk" and remain optimistic on AI more broadly, the change in tack by an asset manager so bullish for so long on the overall AI story was eye-catching in its timing.

Many Fed officials see AI as a significant aggravator of inflation going forward. That view coincides with rising jitters about overcooked equity valuations and earnings projections, cross-financing within the sector, end-usage and even political pushback around data-center building as US midterm elections approach. This week's release of Bank of America's monthly global fund manager survey fleshed out the investor mood, which remained remarkably bullish overall. But there were some signs of a scattering of the herd.

" But although the consensus was that 10-year Treasury yields had further to climb before peaking, on average another 65 basis points higher, the poll breakdown showed that a sizeable portion had already jumped back and thought "peak yields" were not worth the wait. While more than a third of respondents thought the time to switch from equities to bonds wouldn't come until the 10-year hit 6%, almost a fifth felt we had already reached a tipping point. If the most crowded trades unwind between now and year-end, there could be a scramble to lock in prevailing long-term yields before they disappear.

That would be a dangerous moment for financial stability, given how much is riding on the AI bet. But even a small jolt could be a big relief for governments looking for wiggle room in stressed budgets and facing a long list of elections over the coming year. ) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary.

Follow ROI on LinkedIn, and X. And listen to the Morning Bid daily podcast on Apple, Spotify, or the Reuters app. Subscribe to hear Reuters journalists discuss the biggest news in markets and finance seven days a week. IMF chart on intertwined circular financing of the AI boom Bonds and AI-driven chip stocks start to feed off each other?

com; +44 207 542 8488)