When Bond Yields Rise Too Far: The Risk to AI and Global Markets

Two forces could shape the global economy for years: the relentless rise in government debt and the borrowing costs confronting the artificial intelligence boom. Their meeting point is the yield on the US 10-year government bond.

Warnings about US debt date back decades, but the dollar’s reserve-currency status helped defer the crisis that fiscal hawks predicted. Government debt continued to rise while quantitative easing and weak productivity pushed yields lower, reaching almost zero during the pandemic.

That era of cheap money also supported corporate profitability. Investors defending today’s high equity valuations point out that major technology companies now generate substantial profits, unlike many firms in the 1999 dot-com bubble. But the article argues that this is only part of the story.

Average corporate profits rose about 28% in the last quarter, a pace normally associated with a rebound from recession. Yet a federal deficit above 6% of gross domestic product during full employment represents a major transfer of income to the private sector through government spending, social security and tax cuts. Ruchir Sharma of Rockefeller International estimates that federal spending or tax cuts finance up to half of the apparent strength in US earnings.

Cheap government borrowing made that arrangement relatively painless. The bond market has since undergone one of its sharpest repricings in decades. US government bonds have fallen from their 2020 highs, while the 10-year Treasury yield approaches 4.8%, since yields move inversely to bond prices.

The article’s warning is aimed at the next threshold. If the yield moves decisively above 5%, higher financing costs could halt artificial intelligence projects and reshape markets worldwide. The pressure would be especially significant as major technology companies borrow to fund the infrastructure behind the AI boom.