Deutsche Bank: AI bubble burst could become the biggest systemic risk to markets next year; U.S. Treasuries may see an influx of safe-haven funds.

Deutsche Bank's Global Head of FX Research, George Saravelos, said that since the start of this year, pessimistic sentiment toward bond markets among global investors has spread excessively, and the market may be underestimating the possibility of a large-scale influx of funds into bond markets triggered by a major risk emerging in the artificial intelligence (AI) industry. In his view, the biggest systemic risk facing financial markets next year may not be European debt problems, but an unexpected shock in the AI ecosystem. In a report released on Friday, Saravelos pointed out that recent exchanges with U.S. clients showed investors generally worry that the AI investment boom is pushing bond yields higher, while also believing that the U.S. Treasury has gradually lost its ability to control long-term Treasury yields. Against this backdrop, the market has begun speculating that the U.S. Treasury may suspend issuance of 20-year Treasuries to ease pressure in the long-term bond market. At the same time, the recent sharp selloff in the French government bond market has also noticeably worsened investor confidence. Saravelos said the clients he has been in contact with are almost universally pessimistic about French government bonds. However, he believes current market sentiment may have swung to another extreme. Saravelos noted that last year the market's views on AI and bonds were completely different from now. At that time, investors generally believed that AI technological development could boost productivity and curb inflation, while also trusting that the U.S. Treasury could take effective measures to prevent long-term Treasury yields from rising excessively. Now, as AI infrastructure investment drives economic growth and increases financing needs, and as rising energy prices fuel inflation concerns, the market has begun to view AI as an important factor pushing bond yields higher. Saravelos said market views on the bond outlook may already be overly pessimistic, ignoring potential factors that could drive a bond market rebound in the future. In his view, the risk truly underestimated by the market is the possibility of a major negative event in the AI industry itself. Saravelos pointed out: "The biggest systemic risk facing the market next year is not France, but 'something going wrong in some link' of the AI ecosystem, such as a safety accident, a failed IPO, or corporate revenue falling short of expectations." He stressed that the market's concentration risk in AI-related assets is currently extremely high. Once the AI investment boom suffers a major setback, it could prompt investors to reassess the valuations of related assets and drive funds to shift from risk assets to safe-haven assets such as bonds. In his view, such an event could be clearly bearish for the dollar, yet significantly bullish for the bond market, and financial markets have not yet fully reflected this risk. Recently, U.S. Treasury yields have continued to climb to multi-decade highs. The Iran war has led to a sharp rise in energy prices, intensifying market concerns about inflation. At the same time, the U.S. economy has remained relatively resilient, with massive investment in AI infrastructure construction being one of the important driving factors. However, while the AI investment boom supports economic growth, it also increases financing needs, requiring investors to absorb more debt supply. Under the dual impact of inflationary pressure and increased bond supply, U.S. long-term Treasuries have continued to come under pressure. As the bond market suffers a selloff, speculation has been mounting that the U.S. Treasury may adjust the structure of Treasury issuance. Currently, one option receiving attention is to reduce the scale of long-term Treasury issuance and instead increase short-term debt financing. Among these, because 20-year Treasury yields are higher than those of adjacent maturities, cutting or even canceling 20-year Treasury issuance has become one of the radical options discussed in the market. However, the actual effect of this option remains controversial. Some market participants, including strategists at BNP Paribas, believe that canceling 20-year Treasury issuance may not necessarily effectively reduce long-term borrowing costs and could even have the opposite effect. Saravelos believes that, compared with easing upward pressure on yields by adjusting the Treasury issuance structure, a repricing of AI-related risks could become an important catalyst for a bond market rebound. If a major negative event occurs in the AI industry, investors may quickly reduce risk exposure and increase allocations to U.S. Treasuries, driving bond prices higher and yields lower. Regarding the French government bond risk that has recently drawn market attention, Saravelos likewise believes some investor concerns may be exaggerated. He said Deutsche Bank has explained to clients why the current turmoil in the French bond market should not be simply analogized to the European sovereign debt crisis of 2010 to 2015. However, Saravelos acknowledged that, given the sharp volatility in the French bond market last week, it will still take time for investor confidence to recover. He pointed out that turbulence in the French debt market has also brought new downward pressure on the euro, and this risk was originally not part of Deutsche Bank's expectations for this year's market trajectory.