Fear is in the air. Nigel Farage has shied away from a dawn election count face-off with the terrifying Count Binface in Clacton-on-Sea. Meanwhile, Commander Bonespurs did choose to fly in secret, despite a terror threat, but lost his Press Secretary in the process. Apparently, Karoline Leavitt didn’t appreciate a literal application of her surname in being left behind as terrorist ‘bait’ on an Air Force One flight from Ankara. Chivalry, eh! Anyway, courage might be lacking in leaders these days, but financial markets are experiencing a fearlessness which is entering euphoric territory. We now are waking up to headlines on Anthropic’s IPO happening in October with a possible $3 trillion valuation (more on that when I’ve finished spluttering my cornflakes). For context, the stratospheric SpaceX valuation was $1.75 trillion. However, the biggest news of the past week, hidden in the bowels of the global financial system, barely raised an eyebrow……
We have written many times about Japan as a window on our future optimistic world. However, there is a financial risk to Japan which raises its head every few years. Japan has finally beaten deflation but it has been very costly. The Bank of Japan (ie the state) has been both issuing and buying its own bonds/debt for decades to keep interest rates low and stimulate spending/modest inflation. Estimates of Japan’s debt burden suggest it is twice the size of its economy’s GDP (214%). I can remember the days when 100% was considered risky. Now, we are in a new environment where inflation is thankfully rising (in Japan’s case deflation defeated) but bond yields (interest rates) are also rising. That’s a problem because the repayment burden for Japan increases. However, the bigger issue is confidence in the Japanese currency, the Yen. The world’s financial trading desks have been expressing their confidence issues (with debt) by selling the Yen. Typically, most debt crises present as currency implosions. In fact, since 2021 the Yen/US Dollar exchange rate has moved from 100 to 160 in round terms. Until it didn’t. Last week something very big happened. The US government (Treasury Department) started buying the Yen to try to stop it weakening. However, the bigger news is what the US Treasury sold to buy the Yen…
US Treasury Secretary, Scott Bessent, decided to sell the euro currency. He also didn’t bother to tell his ECB counterparts. That is pretty much a nuclear financial first. Central banks and finance ministers of the major currency blocs always keep each other informed and co-ordinate action. Until now. This action without consultation is unprecedented. Not for the first time in the last decade, US motives are more self-serving than bringing leadership. The worry for the US government in Washington was that the Japanese under currency pressure would start to sell its more than $1 trillion of US Treasury bonds they hold for investments/treasury management. This potential Japanese action would, in turn, increase borrowing costs for the US (falling bond price = higher yield/cost). Hence, its wish to strengthen the Yen. But, this action also reveals another lurking fear for Washington. Not only is the White House losing the Iran war, interceptor defence missiles, domestic affordability, press secretaries, reflecting pools and century-old allies by the week, it is also losing its ….. debt/bond markets. See the following headlines:
US long-term borrowing costs rise to 25 year high - The Guardian
US set to pay most for 30-year debt in quarter of century - Fortune
Mortgage rates in US increase to 6.69%, highest since July 2025 – Bloomberg
The strange thing about this increase in US cost of borrowing is that the cost of money (rates) have been falling in recent years (175 bps lower). Clearly, financial markets are not reading the Oval Office or Treasury Department memo. Bluntly put, credibility, credit, risk, trust, truth - whatever you want to call it - is an inherent component of any bond or debt instrument price. As US budget deficits widen, wars linger and national debt hurtles towards $40 trillion the grown-ups on the world’s financial trading floors are losing trust in the Orange Toddler and his sycophantic crime gang. Arguably, the genuine excitement and potential of AI have disguised this credibility slippage. However, I’m concerned about the sheer size of investment capital moving into AI related projects. If it was just equity investment I’d be more sanguine. But, we are now moving into debt financing these projects. Incredibly, Google is investing so much in AI it has now issued bonds/borrowed twice in the last 6 months amounts of $25 billion and $30 billion. Indeed, Google’s famously prodigious cash flow has now moved into negative territory. Of course, it didn’t take Wall Street long to dream up a new financial ‘product”.
Nvidia, as the poster child of AI, has partnered with the titans of finance Goldman Sachs, Blackrock, Apollo, Blackstone and KKR to introduce $500 billion of debt instruments/financing. These debt instruments will be asset-backed by “investable assets” such as chips, AI infrastructure, data centres etc. That just feels early. We sort of know (from trial and lots of error) what a house, bridge, power station or wind farm might generate as assets, but I’m struggling like most humans to forecast the AI future. Watch carefully and wonder have we just re-badged circular financing, vendor finance or NFTs (yep, remember them!!) Now, for the good news.
The sheer scale of capital available to invest in financial assets and technology projects is a reminder of the enormous savings pools desperately seeking homes for returns on investment. The challenge, as we’ve seen in recent European Savings & Investment Account (SIA) initiatives, is to broaden productive investment across the average Irish or European household. While we might guffaw at $3 trillion valuations for Anthropic (albeit with revenues growing 12-fold in 2026), the knock-on impact of huge exits and windfalls can bring confidence and encourage new investors. Closer to home, we don’t always need Wall Street or Silicon Valley to inspire. The €75m exit for Gary Lavin and VITHIT to UK soft drinks player, Nichols plc, is fantastic news while the latest Exponent refinancing of Limerick engineer, H&MV Engineering, at a whopping €1.4 billion valuation is a clue to the multiple ‘unicorns’ in Ireland’s hi-tech construction sector.
As a final thought, it should be viewed as a positive that the headlines confirm investment capital is moving through the world economy with impressive speed and size. The risk is that it won’t be a big headline that will tell us there is a ‘blockage’ in the system. By then, it will be too late. Keep watching the financial plumbing; it might be hidden but it’s critical.