Convergence: Part 2: Retirement Funds
Part 2: Retirement Funds
Retirement & Index Funds
In 2008, the S&P500 lost 37%, seeing losses in retirement funds exceed 25% due to sharp declines in US Equity and Bond indexes, primarily off the back of the high level of investment in subprime mortgage bonds (VanDerhei, 2009).
Retirement funds have not substantially changed the asset allocation categories
~45% Equity
~33% Bonds
~20% Other
~4% Cash
However, the composition of these assets has and will - specifically Equity and Bonds (Thinking Ahead Institute, 2025).
In a world where more retirement relies on US treasuries, US corporate bonds, and equities than ever, we are looking at unprecedented growth of risks across all 3 of these asset classes.
Retirement Fund Composition
Aggregate P7 (AUS, CAN, JPN, Netherlands, Switzerland, UK, US)
Asset allocation from 2004 to 2024
Asset allocation in 2024
(Thinking Ahead Institute, 2025)
Bonds
The bond holdings of retirement funds have remained ~33%.
However, in this time, the composition of these investment grade bonds has changed substantially due to the US expansion in debt (Treasuries).
(The above are approximates based on reliable sources including the holdings breakdown in (IShares Core U.S. Aggregate Bond ETF | AGG, 2026) and (Solving the Core Fixed-Income Conundrum | Guggenheim Investments, n.d.))
Let’s look at the two areas of growth
U.S. Treasuries
Corporate Bonds (IG)
US Treasuries
On the surface, this is acceptable. The US Treasuries carry lower risk (though with a lower yield).
However, in the context of the administration's perspective on currency valuation, specifically the target to lower the value of USD (see Mar-a-Lago Accord), this quickly becomes a problem.
What happens to the Agg, with its large composition of treasuries, if the USD is devalued?
Bond prices fall & yields increase.
Why?
Because Treasuries carry ~0 credit risk their price movements are dictated by inflation and interest rates. A devalued dollar triggers a chain reaction that hits this specific profile.
Higher yields demanded due to
To fight inflation and defend currency, the Fed typically raises interest rates.
Even without the Fed, bond investors will demand higher yields to compensate for being paid back in less valuable dollars.
Bond prices and yields have an inverse relationship. As yields rise, the prices of bonds fall. Because the Agg is so heavily weighted in U.S. Treasuries - which currently have a relatively high "duration" (sensitivity to rate changes) - the index will experience a sharp drop in capital value.
For a foreign investor, buying the Agg involves currency risk.
If the USD devalues, the returns on U.S. bonds become worth less when converted back into their local currency (e.g., Euros or Yen).
A declining dollar usually prompts foreign investors to sell U.S. Treasuries or stop buying new ones. This drop in demand puts further downward pressure on Treasury prices, pulling the overall value of the Agg down with it.
Even if an investor holds the bonds in the Agg to maturity and doesn't sell at a loss, a devalued dollar silently destroys wealth.
If your bond pays 4% a year, but the dollar has devalued and inflation is running at 6%, your real return is negative 2%.
Corporate Bonds (IG)
The bond holdings of retirement funds have remained ~45%.
However, again, their composition has been highly altered as companies have aimed to decrease the expense of higher credit ratings for the bare minimum to remain investable.
(Rezek & Heher, 2019)
Of note: This does not assume any manipulation of the credit ratings (as occurred in 2008). Therefore, it is possible that the companies toeing the BBB line are actively shaping accounts to maintain it - however, this is just speculation.
Overall, this seems to signal a distribution similar to what culminated the 2008 crisis;
The corporate bond quality has declined
The average (mean) credit rating of the overall bond index may be high, but not reflect the true risk of the portfolio.
It is brought up by the massive increase in AAA Treasuries even though their new risk is not reflected by the rating.
At the same time, this increase has ‘subsidized’ the now greatly decreased creditworthiness of corporate, comprising mainly of BBB tranches.
What this shows:
Let’s take the data of credit rating composition from above
And weigh it against the likelihood of default as per the credit ratings (Appendix A)
(e.g. in 2007, AAA = 5% composition at 0.49% average default - weigh the average default rate at value 0.49% and a 5% weighing)
In 2007, the bonds of the S&P500 carry an average 1.05% default rate
In 2026, the bonds of the S&P500 carry an average 1.46% default rate,
This is a 39% increase in default likelihood
With this increase in risk, we would expect the yield premium of these corporate bonds to increase relative to Treasuries
I.e. Comparing the
2007 bundle of bonds dominated with >=A ratings with AAA Treasuries, and
2026 bundle of bonds dominated with BBB ratings with AAA Treasuries
We would expect that the premium investors demand for the BBB (higher risk) bonds would be higher. This is not the case.
(U.S. 10-Year Treasury Yield (The "Risk-Free" Rate) vs Baa Corporate Bond Yield)
What is this telling us:
The default risk of corporate bonds has increased 39% compared to 2007
The risk premium has decreased -35% over the same time
(FRED, 2026)
(FRED, 2026a)
Equities
The equity holdings of retirement funds have remained ~45%.
However, equally, the quality of those equities has decreased.
Although credit ratings reflect bonds, they also signal overall company creditworthiness.
While it can be argued this is a reflection of a more ‘efficient’ company structure, minimizing creditworthiness expense while maintaining investment grade bonds, it is also a sign of decreased resilience to volatility to interest rate shifts which appear inevitable in the current environment.
Original research
Limitation - these are not market cap rated
Upcoming
In 2026, 3 major companies are planning an IPO, each with their own subset of issues and patchwork solutions to cover them up.
While these are by default going to encounter diversification in the S&P500, it is crucial to note that, after their inclusion, over 50% of the S&P has some exposure to the AI bubble.
Let’s discuss each
SpaceX
Q2 2026
$1.75T valuation (possibly $2T)
OpenAI
Q4 2026
$1T valuation
Anthropic
Q4 2026
$380bn valuation
SpaceX
TSLA Context:
Tesla IPO’d on June 29th 2010 under CEO Elon Musk, at $17/share.
From 2019-2020, Elon Musk engaged in an aggressive social media campaign to boost the stock. This included
the beginning of his prolific tweets,
claims like “Elon Musk Promises a Really Truly Self-Driving Tesla in 2020” (Marshall, 2019),
highlights by car fanatics such as Top Gear (The Beginner’s Guide to Tesla, 2021), and
expansion into China (Jolly, 2020).
International EV rebates also bolstered its balance sheet, making 2020 its first profitable year.
With this, it entered into S&P500 with an announcement on 16th November 2020, and effective date of 21st December 2020. Inclusion meant index funds, which track $11+ trillion in assets, were required to add Tesla shares.
In the following 3 months, the stock jumped 98%.
(Google Finance, 2026)
In July 2020, Tesla became the most valuable car company in the world when it eclipsed the market cap of Toyota Motors (TM) (New Constructs, 2020)
With this in mind, we can infer 2 primary takeaways for Musk
The online ‘hype’ bolstered stock performance, market cap, and profitability
By fitting in to the S&P500, the stock can ostensibly become free money - it is suddenly acceptable for most passive investors and funds investing in a diversified portfolio.
One more note:
In March 2025, Elon Musk’s AI company xAI acquired social media platform X for $33bn, which rises to $45 billion when including debt. (Schiffer & Matsakis, 2025)
As at Nov 2023: Valuation was estimated at $11.8 billion - $19 billion (from $44bn when acquired by Musk in 2022) which is likely a more realistic 2025 valuation for the platform
Bundling X into xAI enables fresh capital flow, while the larger valuation enables Musk to sell his shareholding at a massive premium - as the owner of xAI he can set what he will pay himself (via xAI investors) for his X shares.
This is a ‘testing of the waters’ method we will see again in SpaceX.
These lessons learned, let’s take a look at SpaceX.
SpaceX has been profitable since Q1 2023 (Reuters, 2023).
However, not all of Musks’ ventures have been. Looking to xAI
xAI is reported to burn $1bn per month, on the revenue of $500m per year (as at 2025).
At the same time, all 11 founders have abandoned the team in less than 2 years (Stan, 2026)
Musk in 2026 stated the entire platform “was not built right first time around, so is being rebuilt from the foundations up.” (Kolodny & Levy, 2026)
A month earlier, Musk’s automaker, Tesla, said it had agreed to invest $2 billion into xAI, tied to a $20 billion funding round the company had previously announced. (Kolodny & Levy, 2026)
xAI’s Grok has also recently been tied up in controversy due to the proliferation of AI generated child pornography images on Musk’s social media platform X (Twitter)
Just like with bundling X at a premium to xAI, as part of the successful SpaceX IPO, then, Musk can bundle in his failures, priced at whatever price he likes, and package them into one stock to retailers.
With that in mind, SpaceX merged with xAI in February 2026, 4 months ahead of the planned IPO, with SpaceX shelling out a valuation of $250 billion for the business with reported revenues of $500m-$1bn (a 250-500x multiple).
For the second part of the lesson learned with Tesla, Musk has begun to pressure the exchanges in advance of the IPO to enable SpaceX to join the S&P500 and similar indices sooner than previously possible. This would offload the poor quality securities from private equity to retirement funds, at a valuation Musk decides, and with expedited price discovery.
And it seems his strategy is successful, as NASDAQ capitulates.
Nasdaq speeds up index entry for SpaceX, large IPOs with new rule
(Wang & Lee, 2026), (Reuters, 2026), (Bloomberg, 2026)
Companies will now be listed on NASDAQ-100 only 15 days after IPO
(previously, there was a three month period of "seasoning" before listing).
This reduces the amount of time for price discovery.
The minimum 10% float has been removed.
Allows companies to float a very small percentage of their shares, artificially squeezing supply.
Companies that float less than 20% of their shares will have their market capitalisations artificially multiplied by x3, for the purposes of calculating market capitalisation.
This helps large-cap companies to be listed even with very small floats, and inflates their notional market capitalisations on the index.
“During the consultation, one thing that drew criticism was a proposed change that involved low-float stocks, where the amount of shares available for trading is below 20%. With the plan designed to have their corresponding market value multiplied by a factor of five, with a cap at 100%, that sparked concern that demand from passive funds would overwhelm supply.”
“In the final decision, Nasdaq reduced the low-float security weight adjustment to three times.”
Now, even without xAI, the matter of the >$1T valuation is no small feat. With that, there is
Absurd Revenue Multiple
At a targeted $1.75T valuation, SpaceX would be trading at 113x its estimated 2025 revenue ($15B). This multiple is practically unheard of in the sector (for example, aerospace typically deals with 15.27x. High-performing companies like GE Aerospace are trading at premium valuations (approx. 30x–35x EV/EBITDA).
Starlink Market Saturation
To justify a $1.5T valuation, Starlink would need to achieve compounding subscriber growth to hit $100B+ in future revenue. Starlink is a $50-$100/month service. The number of rural or underserved global customers who can actually afford that price point is finite.
Customers in other regions are likely to have access to the superior fibre service, or cheaper cellular service.
"Space-Based Data Center"
A massive chunk of the new valuation relies on a highly theoretical plan to launch "AI data centers in space" to bypass Earth's power grid limitations. This relies on unproven thermal management, radiation shielding, and space-to-earth data transfer.
Reliable models developed thus far have indicated the cost of construction is 3x that of building on Earth, accounting for no maintenance.
(Mccalip, 2025)
The financial models pushing the $1.5T narrative assume Starship achieves its promised 65%+ cost reductions and rapidly scales its launches without a single major failure or regulation. Aerospace is inherently dangerous, and one major accident could freeze revenue for months or years.
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