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

Inflation-adjusted borrowing costs for bonds have surged to their highest levels in over a decade across major economies, raising concerns for stock markets and the global economy, according to Reuters. Real yields, which represent the returns demanded by bond investors above inflation, are now near 18-year highs at around 3% for U.S. 30-year bonds and near their highest in more than a decade for British and German 10-year bonds.

The primary driver of this surge is the increased borrowing by AI hyperscalers like Alphabet, Amazon, and Meta, as well as heavy government spending. With governments projected to run budget deficits of around 6% of GDP or $1.9 trillion in the U.S. alone this year, there is a heightened competition for capital. The U.S. recently paid the highest borrowing cost on a 30-year bond at auction since 2001, at 5.22%.

While markets are pricing in potential interest rate hikes, solid economic growth in the U.S. has so far mitigated the impact on stocks. However, some analysts warn that higher real yields could eventually curb growth by making borrowing more expensive and potentially leading to reduced consumption and investment.