Osterweis Capital Warns Rising Rates Threaten AI Sector
John Sheehan of Osterweis Capital Management warns that sticky inflation and government debt are driving bond yields higher, risking defaults among high-yield issuers.
Rising interest rates and persistent inflation are increasing volatility in the bond market, creating significant headwinds for government borrowing and the AI sector. Speaking at Business Insider's The Long Play event in New York, John Sheehan of Osterweis Capital Management explained that a feedback loop has emerged where constant bond issuance to fund government debt and AI infrastructure buildouts pushes yields higher.
Sheehan predicts one to two additional rate hikes within the next year, arguing that long-term rates are unlikely to decrease materially given current inflation levels. He noted that the increasing portion of the U.S. budget dedicated to interest expenses necessitates further borrowing, which sustains upward pressure on rates.
While the Federal Reserve remains accommodative, Sheehan warned that the current environment will likely lead some high-yield bond issuers to default. He suggested that market history indicates there will inevitably be winners and losers as the sector manages these financial pressures.
