U.S. markets face debt-driven risks as investor warns against bonds

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U.S. markets debt risks warning

Highlights

Total U.S. credit stands near $84 trillion, growing at 5.9%, just keeping pace with nominal GDP growth of roughly 8%, with equity prices relying on this credit expansion.
AI infrastructure investment is forecast to reach $1 trillion in 2027, mostly debt-funded as cash flows weaken, while U.S. net public debt approaches 100% of GDP amid rising entitlement costs.
The commentary advises avoiding bonds except one-year Treasury bills yielding 4.55%, expresses caution on record-high stocks, and notes select opportunities in discounted income funds like Nuveen’s with 11% yield.

Credit growth and balance sheet strains

As reported by Financial Times, the core argument is that credit expansion remains essential to nominal GDP growth, but U.S. balance sheets are becoming increasingly stretched. Total U.S. credit, including government, mortgage and corporate borrowing, stands near $84 trillion according to the Federal Reserve and is growing at about 5.9%, a pace the commentary says is only just sufficient alongside nominal GDP growth of roughly 8% to sustain current asset valuations.

The assessment says equity prices are being held up by that credit backdrop and that a slowdown in credit growth to around 4% would likely tighten financial conditions. It argues that debt-funded expansion, especially in AI infrastructure, is unusually large by historical standards, with hyperscalers borrowing hundreds of billions of dollars to finance data center buildouts.

The commentary also points to forecasts for $1 trillion of AI-related investment in 2027, with funding expected to come from debt as positive cash flow has faded. On the public side, it warns that net U.S. debt is near 100% of GDP and that demographic pressures from aging populations are likely to increase future Social Security, Medicare and Medicaid costs.

Portfolio implications for stocks and bonds

Against that backdrop, the investment view is to avoid bonds except for one-year Treasury bills, which are yielding 4.55%, and to remain cautious on stocks at record levels. The reasoning is that higher yields over time are likely to squeeze profit margins and bring more volatility to both equities and benchmark 10-year Treasury bonds.

In sector terms, the commentary is wary of hyperscalers unless their price-to-earnings ratios fall below 20. It also says income-oriented investors may find some appeal in Verizon and AT&T because of their yields, though both face competitive pressure from SpaceX's Starlink Mobile in the mobile market.

The piece further highlights possible opportunities in income funds trading below net asset value, citing Nuveen Preferred & Income Opportunities Fund as an example with an about 8% discount to NAV and an 11% yield. Even so, it cautions that such funds would come under pressure if short-term rates rise more than expected.

In our earlier coverage of AI-related borrowing in riskier corners of the U.S. credit market, we noted that issuance by lower-rated AI-linked companies has been rising even as lenders demand clearer proof of future cash flows. The piece highlighted how borrowing costs climb sharply for weaker issuers, pushing investors to concentrate on better-quality credits and to scrutinize deal terms, collateral, and revenue visibility more closely.

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