Rising Real Yields Put Pressure on Global Markets as AI and Government Borrowing Surge

By COMFORT OGBONNA

Inflation-adjusted borrowing costs have climbed to their highest levels in more than a decade across several major economies, raising concerns that a surge in borrowing by technology companies and governments could eventually weigh on stock markets and economic growth.

Real yields, which measure the return investors demand from bonds after accounting for inflation, are an important gauge of the underlying cost of borrowing. They are influenced by expectations for economic growth and interest rates, as well as the supply and demand for government and corporate debt.

In the United States, the real yield on 30-year inflation-protected government bonds has risen to around 3%, close to its highest level in nearly two decades. Real yields on 10-year British and German government bonds have also climbed to levels not seen in more than a decade.

Investors and analysts say the increase is being driven by several factors, including heavy borrowing by major technology companies investing in artificial intelligence, continued government spending and expectations that interest rates could remain elevated.

The scale of borrowing by large technology companies has grown sharply as businesses race to build data centers, expand computing capacity and secure the infrastructure needed to support increasingly sophisticated artificial intelligence systems.

Alphabet, Amazon and Meta have collectively issued nearly $220 billion in bonds so far this year, more than twice the roughly $108 billion they issued during all of last year, according to market data.

The flood of new corporate debt is competing with government bonds for investors’ money. As the supply of bonds increases, investors can demand higher yields before committing additional capital.

That dynamic could become increasingly important if companies continue to borrow heavily to finance AI-related investments.

“There is a competition for capital which is relatively unprecedented in recent times,” said Vivek Paul, U.K. chief investment strategist at BlackRock Investment Institute.

The pressure is not limited to technology companies.

Governments around the world are also running large budget deficits and issuing substantial amounts of debt to finance spending. The U.S. budget deficit is expected to remain around 6% of gross domestic product, or about $1.9 trillion, this year. France’s deficit is projected at about 5% of GDP, while Britain’s is expected to be around 4%.

In Europe, some of the increase in government borrowing is being driven by higher defense spending, energy security and infrastructure investment.

The combination of corporate and government borrowing means investors are being asked to absorb an unusually large amount of debt at a time when central banks are no longer providing the same level of support they offered in previous years.

Central banks had previously purchased large amounts of government bonds, helping keep yields lower. With those purchases reduced or discontinued, private investors are shouldering more of the demand for newly issued debt.

Economic growth is also playing a role.

Relatively strong growth, particularly in the United States, can encourage investors to expect interest rates to remain higher for longer. Expectations of future rate increases generally push real yields higher.

The increase in real yields has contributed to higher nominal borrowing costs as well. Inflation expectations have remained relatively stable, meaning much of the recent rise in bond yields has been attributed to higher real rates rather than a significant increase in expected inflation.

The cost of borrowing for the U.S. government has already reached notable levels. A recent auction of 30-year Treasury bonds produced a yield of 5.22%, the highest borrowing cost for a 30-year U.S. government bond at auction since 2001.

Higher real yields are particularly important for financial markets because they influence how investors value stocks and other riskier assets.

When inflation-adjusted bond returns rise, bonds can become more attractive compared with equities. Investors may have less incentive to take additional risk in stocks when government securities offer higher real returns.

Higher yields can also reduce the value investors place on future corporate earnings. Companies whose valuations depend heavily on profits expected many years in the future can become particularly sensitive to rising borrowing costs because those future cash flows are discounted at higher rates.

So far, however, global stock markets have largely absorbed the increase in yields.

Major equity indexes have remained near record levels, supported by strong corporate earnings and relatively resilient economic activity. Expectations for corporate profits have also remained positive, with U.S. earnings forecasts being revised higher and European blue-chip companies expected to post their strongest profit growth in several years.

But some investors warn that the impact of higher real rates could become more visible if technology companies continue to spend heavily on AI infrastructure and increasingly depend on debt rather than internal cash flow.

Large technology companies have substantial resources, but the cost of financing massive investments could become more significant if borrowing costs continue to rise.

“If real yields continue rising, they could eventually choke off some of the borrowing that has been driving investment and the shift toward riskier assets,” said Matt King, founder of Satori Insights.

Higher borrowing costs could also eventually affect households and businesses outside the technology sector. Companies may postpone investments, while consumers could reduce spending if higher interest rates increase the cost of mortgages, credit cards, auto loans and other forms of borrowing.

That could slow economic growth.

Ashok Bhatia, chief investment officer at Neuberger, said U.S. real yields remain below the range where he would expect a significant drag on economic activity, which he estimated at roughly 3% to 4%.

Nevertheless, he described current levels as a warning that the economic expansion could face greater pressure if borrowing costs continue climbing.

The concern is particularly significant for longer-term government bonds, where investors must consider not only monetary policy but also the possibility that governments will continue running large deficits.

Some analysts believe the structural forces pushing real yields higher are unlikely to disappear quickly. Governments face pressure to maintain spending on defense, infrastructure and other priorities, while technology companies are continuing to invest enormous sums in artificial intelligence.

For investors, the question is how high real yields can rise before they begin to change corporate behavior and market sentiment.

If yields stabilize, companies and investors may continue adjusting to the higher cost of capital. But a sustained increase could eventually make borrowing less attractive, slow investment and place greater pressure on highly valued stocks.

The current strength of global equity markets suggests investors remain confident that economic growth and corporate earnings can withstand higher borrowing costs.

Still, the rise in real yields is becoming an increasingly important signal for financial markets. If borrowing continues to expand faster than investor demand for bonds, companies and governments may have to offer increasingly attractive returns to secure financing.

That could create a new challenge for markets that have benefited for years from relatively low borrowing costs.