Analysis:AI-driven surge in bond yields could be next risk for markets and growth

Inflation-adjusted borrowing costs for bonds have reached their highest levels in over a decade across major economies, driven by AI companies and governments increasing bond sales. Real yields, which represent returns demanded above inflation, are crucial indicators of true borrowing costs for governments and companies, determined by growth, interest rates, and money supply expectations.

U.S. 30-year real yields are near 18-year highs at around 3%, while British and German 10-year real yields are at their highest in over a decade. The surge in borrowing by AI hyperscalers, coupled with heavy government spending, is pushing up yields as buyers demand higher returns for purchasing the large influx of bonds. Despite steady inflation expectations, real yields have risen, pushing up nominal yields globally.

AI companies like Alphabet, Amazon, and Meta have issued nearly $220 billion in bonds this year, more than double the $108 billion issued in all of 2025. Governments worldwide continue to borrow heavily, with the U.S. budget deficit projected at 6% of GDP ($1.9 trillion), France at 5%, and Britain at 4%. Markets are pricing in rate hikes, which typically increase real yields.

Strong economic growth, particularly in the U.S., and central banks' reduced bond purchasing are factors contributing to the rise in real yields. While higher real yields may eventually slow growth, stocks have so far resisted the concerns, hitting record highs. However, analysts warn that if AI companies start to rely on credit, the impact of rising real yields could become more pronounced.