The American debt is in danger: The surprising move that is scaring the markets

Financial markets are currently facing two central dramas: an unclear move by the US Federal Reserve that is shaking the bond market, and the massive investments of tech giants in artificial intelligence, which raises the question of whether this is a huge opportunity or a financing risk.

Upon taking office as Chairman of the Federal Reserve, Kevin Warsh stated that the central bank is committed to returning inflation to a target of 2% and will not tolerate price increases. However, the recent decision to leave the interest rate unchanged, without signaling a clear roadmap for the future, created much confusion among investors.

The gap between the hawkish statements and the lack of action led to a jump in the yields of long-term US government bonds to the highest levels in about 20 years. Investors, who have lost some of their confidence, are now demanding higher compensation to hold American debt.

Pressure on the US bond market came unexpectedly from Japan. Following the plunge of the Japanese yen to a low of over 40 years, Japanese authorities acted to strengthen the local currency. Since Japan holds US bonds in a huge volume of over 1.4 trillion dollars, the market fears that it sold some of these bonds to finance the activity, which worsened the fall in bond prices and raised yields even further.

At Sigma Clarity, they estimate that the global risk level has risen significantly. Therefore, although yields today look tempting, it is still not recommended to increase exposure to long-term bonds, as the existing risk in the market is still high.

Idan Azulay, Chief Investment Officer of the Sigma-Clarity investment house (Photo: Orel Cohen)

One of the biggest concerns in the market today is the decline in the free cash flow of tech giants. Free cash flow is the money that remains for a company after it pays for all investments and equipment. Since companies like Google, Meta, Microsoft, and Amazon are investing huge sums in building data centers and purchasing chips, it seems at first glance as if their cash flow has been hurt.

But there is no reason to panic. Building giant infrastructure takes time. The expenditure is taking place today, but the revenues and profits will mature later. Many cloud computing contracts were signed in the past at low prices. As these contracts are renewed, the companies will be able to charge higher prices for their capacity, which will increase profitability significantly without the need for additional investment.

Monetization is already underway. The unusual pace of investment is expected to moderate in the coming years, while revenues from AI activities will rise, which will return free cash flow to a rapid recovery.