The bond market has been under intense scrutiny as interest rates fluctuate sharply, impacting various sectors, particularly the AI trade. While rates have dipped below 5% recently as investors seek safety in fixed income, higher yields may persist due to sticky inflation and strong demand for capital from AI developers and governments. This environment is complicating the outlook for the bull market, as higher borrowing costs could reduce spending and increase financial burdens for companies relying on debt.
John Sheehan, a portfolio manager at Osterweis Capital Management, discussed these challenges during a panel at Business Insider's 'The Long Play' event in New York. He noted that the constant issuance of new bonds is pushing interest rates higher, which could eventually lead to some firms facing financial trouble. 'Anytime we get some stability, or even bonds start to do a little better, you're going to see more supply dropped in and sort of cap your upside,' he said, explaining how falling yields encourage more borrowing, which in turn drives rates back up.
Sheehan also addressed concerns about potential Fed rate hikes in December, downplaying their immediate impact on AI firms. He highlighted that some companies are already trading at high yields, making small Fed adjustments less significant. Looking ahead, he anticipates one to two rate hikes in the next year, aligning with market consensus. However, he sees little relief for long-term yields, citing persistent inflation and rising government debt as key factors.
In this volatile environment, Sheehan is adopting a cautious investment strategy, maintaining a shorter duration of around 1.75 years to balance higher yields with reduced risk. This approach allows him to lock in attractive coupons while minimizing exposure to prolonged rate increases.