INSIGHTS

On July 13, 2026

AAM Viewpoints — Inflation, the Fed and the Case for Individual Bonds

Over the last many years, much ink has been spilled on how advances in technology ultimately lead to lower costs through improvements in efficiency and productivity. While that may prove to be true this time as well, it is worth considering how the fast adoption and related increase in capital expenditures by those participants most heavily involved in the AI (artificial intelligence) infrastructure build-out (think hyperscalers, large language model developers and chip manufacturers) have actually contributed to inflationary pressures and may continue to do so.

Recent developments with regard to the build-out of AI have significantly increased the demand for high-bandwidth memory (HBM) chips, which is the critical memory utilized by AI accelerators (the major companies involved with GPU and NPU formats among others) that hyperscalers utilize to build and train their models (the main providers of AI services). To meet this demand, chip manufacturers have shifted production capacity away from more legacy-type products into these higher-margin HBM products which has effectively created a shortage in the more traditional memory chips. As could be expected, this shortage has led to price increases in other products that utilize semi-conductors such as servers, PC memory/storage and mobile devices, to name a few. Some prognosticators have predicted technology price increases to continue — at least in the near term — with the theme being that prices for many goods could continue to rise. In fairness, however, companies utilizing this new technology expect to see increasing return on investment in their respective industries given the initial cash outlay, so that could put some pressure on spending at some point if increasing margins don’t meet expectations. Increased hardware costs related to AI, coupled with rising energy demand for data centers, could be one of the reasons inflation remains “stickier” than expected in the near to intermediate term.

Definitions: DRAM = Dynamic random-access memory; DDR2 = Double Data Rate 2; SSD = solid state drive; NAND = (short for "NOT AND") is a fundamental digital logic gate and a widely used type of non-volatile flash memory. Sources: TrendForce, S&P Global Market Intelligence / Visible Alpha, Jefferies, NAND Research, CBS News. | Past performance is not indicative of future results.

Increased costs related to the AI build-out isn’t the only input to inflation, it’s but one of many. New Federal Reserve Chair Kevin Warsh seems to be hyper-aware of this fact. He is bringing a new type of credibility to the Fed whereby it doesn’t seem likely that they will wait to be reactionary to inflation. Warsh’s Fed could take steps to tighten policy sooner rather than later instead of accommodating inflationary pressures, such as temporary energy shocks, supply chain challenges and manufacturing input costs — especially while economic growth remains resilient. In fact, the last PCE (Personal Consumption Expenditures) data release showed a 4.1% year-over-year headline inflation number which is still well above the Fed’s target while income and spending remain firm. Treasury futures have also shifted to now reflect expectations of one to two rate hikes over the next year. Additionally, Warsh’s Fed will be decidedly different than what we’ve been used to with much less forward guidance as to what moves they may make. Treasury yields at current levels are higher than what we’ve mostly experienced in recent years, and while aren’t exactly in accommodative territory, they could remain in this range for a while longer to combat these inflationary forces as opposed to an immediately lower yield regime.

One of the factors that has helped finance the build-out has been historically low borrowing costs, as measured by credit spreads, which have generally been supported by many consecutive quarters of increasing margins and net earnings in large cap companies, driven by the aforementioned leaders in the technology space, but is true for virtually all corporate credit sectors. As we outlined in our November 3, 2025 Viewpoints — Corporate Credit Spreads Are Tight. How Long Can They Stay That Way? — credit spreads are tight and remain so today as liquidity and demand for income-producing products remains high for institutional investors, such as pension funds and insurance companies. These investors are major players in the fixed-income markets and, broadly speaking, are currently in a very strong funding position. One driver for this is higher overall net yields have decreased the value of their longer-term liabilities as discount rates have risen, meaning any incremental spreads let them earn a premium to those liabilities, thereby creating solid demand. Not to mention that they’ve seen strong equity market performance over the last few years in that part of their asset allocation as well. While yields remain high, we expect heightened demand to remain also.

U.S. Corporate investment grade option-adjusted spreads (3 years)

While there are several ways for individual investors to gain “exposure” to the fixed income markets, sometimes the best way may be to “keep it simple.” Despite generally tight spreads, current net yields are attractive for income-oriented accounts. Building portfolios appropriate for each investor’s individual risk tolerance and income needs has the potential to be accomplished through various strategies including simple ladders, barbells or simply a diversified basket of individual bonds across sectors and products. While also gaining exposure to bonds for the potential portfolio ballast effect that packaged products offer, investing in individual bonds allows for a known income stream and, if held to maturity, a shrinking exposure to duration as time goes on, all while allowing for a known return as they mature at par (barring default). Although unique to each investor, being diversified may be accomplished by owing a reasonable mix of credits across several sectors, credit profiles and duration. For individual bonds, market liquidity is robust and transaction costs are low, which compares well with all other options available. It could be a great time to lock in yields currently available with individual bonds with known maturity dates as “higher for longer” probably won’t mean “higher forever.” Contact your AAM representative for more information.

CRN: 2026-0709-13599 R