Deeply seeking the impact of AI spending on bond yields
"We asked everyone the same two questions,” said Vinny. “'What is your assumption about home prices, and what is your assumption about loan losses.’ Both rating agencies said they expected home prices to rise and loan losses to be around five percent — which, if true, meant that even the lowest-rated, triple-B, subprime mortgage bonds crafted from them were money-good.
— Excerpt from The Big Short by Michael Lewis
While most people consider the start of the global financial crisis (GFC) to be the collapse of Lehman Brothers in September 2008, the lead-up began much sooner. Mortgage delinquencies and defaults began to materialize in early 2007. Loose US lending standards and a galloping housing market had led banks to issue loans to millions of borrowers who could ill afford them. Lax regulations, meanwhile, had allowed markets to create complex mortgage-backed securities that included risky credits. When the housing market faltered, loan losses piled up. The prevailing narrative quickly shifted from “house prices can’t fall” to “loan losses will be contained” to “some mortgage bonds are still ‘money-good,’” meaning that although securitizations were taking losses, ultimately the highest-rated bonds would not lose principal. The rest, of course, is history.
That history is now rhyming with the current AI spending narrative.
