Forget AI, debt has become the main character on Wall Street as markets just now decided that it’s gotten out of control after years of warnings

Wall Street's focus has shifted from the AI boom to the growing concerns surrounding debt, as investors recognize the mounting mountain of debt as a major issue. For years, dire warnings about the spiraling U.S. debt were dismissed, but now the debt pile has reached unsustainable levels, according to experts. Rating agencies have downgraded U.S. credit, and foreign central banks have reduced their Treasury purchases.

The tipping point of debt becoming a concern was unclear, but the recent global bond selloff and rising yields in top economies like the U.K., France, Germany, and Japan signaled that it's finally a major worry.

The economic landscape has changed significantly since the COVID pandemic, with interest rates rising to combat high inflation, the AI boom fueling capital expenditures, and hyperscalers relying on debt for financing. The combination of high deficits and other factors, such as the return of higher oil prices due to the U.S.-Iran tensions, has finally triggered alarm bells in the market.

Federal Reserve Chairman Kevin Warsh's refusal to provide forward guidance on policy responses has added uncertainty, further contributing to the upward pressure on bond yields. Economic populism from both the left and right, including increased spending and tax cuts, creates concerns about potential banking and currency crises.

Investors are demanding greater compensation for fiscal, geopolitical, and policy uncertainty, leading to a higher term premium. Capital Economics predicts that the bond markets will remain volatile in the coming quarters due to these concerns. As governments show no signs of curbing deficits, the term premium is fundamentally warranted. The market's concerns are rational, as there are no indications that governments will take measures to address the mounting debt issues.