The world post-GFC operated on abundant savings and structurally low rates, with governments building their finances around the assumption that cheap capital would last forever. However, this world is changing as sovereign financing needs are enormous, while AI is creating unprecedented demand for capital. SpaceX reportedly seeking $40bn and Broadcom exploring more than $50bn in financing only add to the pressure. The potential crowding-out effect is massive, and if AI can generate 20-30% IRRs, borrowing at high single-digit rates makes perfect sense. But what happens to everyone else competing for that capital? This may explain why real yields refuse to fall, and why sovereign duration may be flashing an early warning.

As AI becomes increasingly self-financing, the implications for the broader economy are significant. Either AI becomes increasingly self-financing, or capital gets rationed elsewhere and weaker parts of the economy start to crack. The consequences of this capital squeeze are far-reaching, and could lead to a re-evaluation of the current economic landscape.

The widening CCC spreads may already be flashing an early warning, and it’s clear that the capital squeeze is not just a theoretical concern. The race for capital is on, and it remains to be seen how the economy will adapt to these changing dynamics. Will AI continue to thrive, or will the capital squeeze have unintended consequences for the broader economy? Only time will tell, but one thing is certain: the capital squeeze is a trend that cannot be ignored.