• Delayed Fed hikes herald higher-for-longer environment
• Volatility may yet widen currently accommodative yield spreads
• NVIDIA’s USD 500bn AI infra partnership an all-in private capital bet

Europe may have enjoyed a rare solar eclipse this week, but nothing seems able to extinguish the glare of US M&A.

Even the threat of inflation data dimming the lights was averted. With the annualized July CPI print on Wednesday (12 August) falling 0.1 percentage point from last month to 3.4%, expectations of Fed rate hikes have been moderated.

It’s been an astonishing few days on the deal front. Josh Kushner and Bob Iger’s extraordinary USD 12.5bn takeover of the LA Lakers from embattled tycoon Mark Walter; Ari Emanuel’s MARI Group making a GBP 4.5bn (USD 6.1bn) swoop for transatlantic theatre and ticketing player ATG Entertainment, and Goldman Sachs’ drive to further consolidate asset management with its USD 2.25bn play for NEOS Investments – they all pushed further to realize 2026’s stellar promise.

What worries Continental Drift is not corporates’ logical pursuit of scale in a more fractured world, especially where paper consideration limits balance sheet risk. It’s that this same political and macroeconomic instability will embed much higher-for-longer inflation than will be comfortable for US private capital.

Coupled with the potential for irrational exuberance while pursuing private credit opportunities in the race to build out AI, asset managers could find themselves overextended if the moon shifts from blocking the sun to pulling back the valuation tide.

Let’s take a closer look at the inflation data. Progress on energy indeed gives cause for cheer. The seasonally adjusted monthly change in this category was -1.5%, with gasoline -2.9%. Yet energy prices nonetheless remain 14.7% higher over 12 months, with food up 3% on that same basis.

And 3.4% remains worryingly high against the Federal Reserve’s 2% inflation target. Even tempered rate rise expectations near-term can be read as a cause for concern. The spread between 5-year and 30-year Treasuries steepened out beyond 90bps this week; it had been as flat as 69bps back in June.

Fed Chair Kevin Warsh may not like to give forward guidance, but the market is making its own judgment: that sufficient dovishness will prevail – in line with President Donald Trump’s preferences – if inflation data provides the slightest fig leaf. This comes at the cost of steepening the rate curve.

Higher for longer. And potentially much longer.

While fears of a rate rise next month have fallen away, there remains a 62.6% chance of a hike by December, according to CME Fedwatch. Further, there is a 74% chance that rates will remain at 3.75%-4.0% or above through to October 2027 (versus the current 3.5%-3.75%).

Treasury Secretary Scott Bessent is entirely cognizant of the tricky path the Fed has to tread in this landscape, which is one of the major reasons he has pushed so hard on Japanese yen intervention.

It’s widely accepted that the US’s efforts to prop up the yen have less to do with altruism – indeed, Bessent’s matching sale of euro-denominated assets was deeply unsentimental – than with seeking to avoid Tokyo flooding the market with Treasuries and forcing up yields.

Given the US federal deficit is heading towards 7% of GDP, Bessent’s yen action is understandable.

But such a move even as the Bank of Japan refuses to budge its interest rates higher conjures an image of frailty. And one that runs alongside the Trump administration’s unforced errors on tariffs and Iran so far in the president’s second term.

Thus far, the impact on the high yield financing open to sponsors and their portfolio companies has undoubtedly been muted. The high yield spread remains a bafflingly sanguine 271bps. However, what’s noticeable is that the gaps between yield spread peaks have narrowed over the past two-and-a-half years as geopolitical instability increases.

From the October 2023 high of 453bps to the August 2024 high of 393bps, we saw a gap of just over nine months. The next gap to the 7 April 2025 high of 461bps was eight months; then we have seven months to November 2025’s 319bps high; and four months till March 2026’s 346bps high.

We’re probably overdue another spike. And it’s certainly plausible to see how delayed Fed action, deficit concerns, panicked yen support and runaway private credit involvement in AI financing could coalesce to bring some fear back into markets.

Indeed, NVIDIA’s unveiling this week of strategic partnerships with Apollo, BlackRock, Blackstone, Brookfield, Goldman Sachs and KKR to put USD 500bn to work across AI infrastructure build out represents the kind of all-in bet that those concerned about ROI on LLMs get jittery about.

Wall Street’s biggest players creating a colossal, glorified Klarna for NVIDIA’s customers is a bit of a red flag if you think AI valuations are getting way out over their skis.

And it brings us right back to inflation, with Federal Open Market Committee member Neel Kashkari’s hawkish dissent to holding rates last month pointing to “massive investment in data centers [as] a new demand element to the high inflation Americans are experiencing”.

The forward march of US M&A shows no signs of being halted. And the growth prospects from AI infrastructure construction add much to the positive side of the ledger.

But sponsors should focus on exits while the going is good, regardless of how aggressive their marks are, and show discipline across financing entries. Dark times may not be visible on the horizon – but the outlook is obscure.

by John West