FICC Focus Special: Barings' Slaven Is Cautious on…

PodcastFICC FocusTrevor SlavenOct 6

Slaven highlights the scale and financing demands of AI investment, while cautioning that the profitability of different parts of its value chain and the durability of business models remain uncertain. He also discusses demographic pressure on the US labor force, inflation and policy trade-offs, and the risks posed by the budget deficit. In markets, he favors income and carry over reliance on traditional hedges or long-duration exposure; separately, the host reports expectations for further rate hikes across major central banks.

Artificial Intelligence Fixed Income Investment Strategy Inflation Monetary Policy Labor Market

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Key Takeaways

Slaven describes AI infrastructure as a historic, long-horizon capital-spending cycle, but says its reliance on circular and external financing leaves the buildout vulnerable and its business models unproven. He says investment-grade net issuance is expected to reach three to four times its average over the past five years, with virtually all of the increase tied to AI, making choices across the supply chain and project life cycle important for performance over the next one to two years; he also says it remains uncertain which parts of the value chain will capture the most profit.

Slaven says core CPI was 2.4%, the cycle low, and that core inflation is still gradually disinflating even as headline inflation may remain noisy; he argues the Fed may need to tighten less than markets expect and that rates are a blunt tool for energy, food, or AI spending. Against that view, markets had repriced the expected mid-2027 fed funds rate by almost 200 basis points toward hikes, while the host cited pricing for a 68% chance of an October Fed hike and at least one more hike each from the ECB and BOJ before year-end.

Slaven identifies a difficult policy balance: tightening could weaken the labor market and increase the need for fiscal support, while easing too soon could damage credibility and trigger a back-end bond sell-off. He also says the US labor force is expected to plateau over the next several years and that the nearly intractable deficit could be addressed only through major spending cuts, tax hikes, or significantly higher yields; he expects deficit financing needs to counteract Fed tightening’s support for the dollar.

GEO-POLITICS

AI Competition — Slaven describes US-China AI competition as a geopolitical dynamic. It remains uncertain which parts of the AI value chain—models, semiconductors, or data centers—will capture the most profitability.

“The competition between between US and China to kind of, you know, be the be the winner, if you will, in the AI race…”—

TECHNOLOGY

AI Infrastructure — Slaven identifies the AI revolution and the historic capital expenditure to build its infrastructure as major forces. The investment is intended to support AI business models for years and decades.

“One is what everyone kind of knows and talks about every day, which is the AI revolution and all this historic CapEx that's taking place to build out the infrastructure…”—

ECONOMY

Labor Force Plateau — Slaven says US demographics are expected to cause the labor force to plateau over the next several years, a transformation the country has not previously had to deal with. He notes implications for policy, markets, and investing.

“How does AI integrate with the labor force and with employment at a time when we're seeing this other sort of traditional historic transformation, which is a plateauing of the…”—

Core Disinflation — Slaven cites a 2.4% core CPI reading, the lowest of the cycle, and says he still believes core inflation is gradually disinflating despite external shocks, while headline inflation may remain noisy. He expects the Fed may need to tighten less than markets expect and argues that rate policy is a blunt tool for influencing energy prices, food prices, or AI capital spending.

“And yet all this is happening at the same time where actually the most recent core CPI print was the lowest print of the cycle at 2.4%…”—

Policy Trade-Offs — Slaven says policymakers face a trade-off: tightening could weaken the labor market and increase the need for fiscal support, while easing too soon could damage credibility and prompt a sell-off in the back end of the bond market. Rising debt and interest expense add to the pressure, he says.

“And there's a tremendous amount of sensitivity to our interest expense, our growing debt. And so I think in either scenario, that's where the bond market…”—

MARKETS

AI Credit Issuance — Slaven says AI capital expenditure requires substantial external financing and is affecting credit markets. Investment-grade credit net issuance this year is expected to be three to four times the level of the past five years, with virtually all of the increase tied to AI financing. He says where investors lend or invest across the AI supply chain and project life cycle will matter for performance over the next one to two years.

“But then there's so many implications for that, and we're seeing it in in markets in terms of there's a tremendous amount of external financing that needs to take place…”—

Fed Funds Repricing — Slaven says markets repriced the expected fed funds rate for mid-2027 by almost 200 basis points relative to the beginning of the year, shifting from anticipated cuts to hikes. He says the war in Iran and commodity prices had a major influence on the move.

“There's been almost 200 basis points of a repricing of where the fed funds rate will be by mid twenty twenty seven, today relative to the beginning of the year…”—

Rate Pricing — The host reports that markets were pricing a 68% probability of another 25-basis-point Fed hike in October and four hikes over the following 12 months. The host also says markets were pricing at least one more rate hike from both the ECB and the BOJ before year-end.

“And for our audience today is Tuesday, September 29. So let's just create some context around this. Right?…”—

FORECASTS

Duration Volatility — Slaven expects more volatility in the longest-duration assets over the next one to three years. He says high-quality credit offers attractive real and nominal yields without much duration risk, and recommends shifting toward income and carry while holding less long-duration exposure.

“And that's putting a lot of pressure at the very back end of the bond market…”—

AI Investment And Portfolio Positioning

Slaven describes AI infrastructure spending, its uncertain business-model winners, and demographic change, then recommends favoring income and carry over volatile long-duration exposure.

Carry Over Long Duration

Slaven argues that AI financing and fiscal pressures make long-duration assets vulnerable, while high-quality short-duration credit offers attractive income and a more certain return profile.

Inflation And Fed Policy

Slaven sees ongoing disinflation in core prices despite energy and food shocks, and thinks the Fed’s ability to control headline inflation with rate policy is limited.

Deficits And Policy Constraints

The speakers weigh inflation fatigue against the risks of damaging a modestly growing labor market, while warning that either easing or tightening could aggravate fiscal and bond-market pressures.

Emerging Markets’ Stronger Foundations

Slaven credits emerging markets with prudent post-pandemic tightening, improved supply-chain positioning, and AI-linked exporters, supporting stronger fundamentals and valuations.

Dollar Range And Currency Value

Slaven sees limited structural upside for the euro and sterling, some relative-value potential in the yen and emerging-market currencies, and a dollar likely to remain range-bound.

Portfolio Hedges And Private Credit

Slaven cautions that traditional hedges are less reliable and favors simplifying portfolios with short-duration carry, while noting selected high-quality private assets can complement that approach.

AI Financing And Market Risk

Slaven says AI-related financing dominates new credit issuance and requires careful selection across the project lifecycle, while identifying the budget deficit and uncertain AI business durability as major risks.