High Yields To Pull Asset Prices Down | Danielle Park

Danielle Park says easy financing has encouraged AI capacity expansion even as revenue per user weakens and pricing faces pressure, which she sees as a possible sign of a late-stage investment cycle. She also says AI-related spending, including data-center construction, probably supported U.S. growth above 3% in Q3, while Nvidia and Meta were holding up a market with weak breadth.

Park argues that post-GFC easy money fueled debt growth and undisciplined capital allocation, while higher rates are now restoring rate discipline as borrowers renew debt at more oppressive payments. She says the strain could reach beyond leveraged investors: losses may spill into the broader economy, where job losses are possible, and about $1.4 trillion of investment-grade corporate debt is due for renewal by 2030 at higher borrowing costs.

Park expects higher rates to add disinflationary pressure, including deflation in some areas, and says easing rent pressure could matter because shelter represents roughly one-third to 40% of CPI. At the same time, she says the Iran war pushed fuel prices higher and that fuel costs feed into other economic inputs; she also notes that high oil prices can eventually suppress demand and encourage supply.

Park expects U.S. and Canadian home values to decline over the next couple of years as affordability remains stretched: prices are about 5.2 times median income in the U.S., 8.9 times in Canada, and 10 times in Toronto and Vancouver. She says the adjustment could continue for a couple more years, consistent with housing cycles that typically take five to seven years, while Canadian mortgage rates have risen from about 1.3% to above 4.5% and rate buydowns near 3% have not been enough to generate demand.

Canadian mortgage renewals may intensify household payment pressure: mortgages make up 70%–74% of household debt, and about 12% of outstanding mortgages are due to renew in 2027 facing an estimated 15% rate increase. In the U.S., Park says roughly half of outstanding mortgages carry rates above 4% despite many borrowers having locked in rates below 2%, while refinance applications were down 56% year over year in September.

Park says the U.S. 10-year Treasury yield had risen 130 basis points in seven months—more than the roughly 80-basis-point increases she cites at the peaks of the 2000, 2007, and 2022 cycles—and believes a risk-correction phase has begun but may have further to run. Credit stress is also emerging: CCC-and-lower-rated spreads have widened to November 2022 levels, and the spread between that debt and BB debt is at its widest since the mid-1990s, though John says it is not yet an alarm bell.

Park says the TSX has limited diversification value because of its strong correlation with other markets, while U.S., Japanese, and Canadian market capitalizations each exceed 200% of GDP, raising mean-reversion risk. Separately, John says U.S. large-cap stocks are at a CAPE of 40.5, the 99th percentile, and the speakers see risk of lower prices as valuations mean-revert alongside widening credit spreads.