AI borrowing pushes long-term bond yields to 15-year highs

Long-term bond yields have reached their highest levels in over 15 years in most major advanced economies, according to the Organisation for Economic Co-operation and Development (OECD). The report, titled "Weathering Successive Shocks," was released on Wednesday. The OECD attributes the rise in yields to concerns over government finances and heavy corporate bond issuance by artificial intelligence (AI) companies.

AI companies' borrowing is creating upward pressure on borrowing costs and increasing pressure on government finances. The OECD highlights the need for higher returns to hold longer-term bonds, known as the term premium, which is the additional compensation investors demand for holding longer-term securities.

The scale of AI investment is also driving up demand for funding, leading to further increases in long-term sovereign bond yields. The OECD warns that more significant rises in yields could occur as AI companies compete for funding in the private sector due to their substantial bond issuances.

The report also raises broader financial risks, citing the growing use of leverage and complex financing structures by AI companies, which could be exacerbated by a sharp change in investor sentiment. If AI-related companies fail to meet investor expectations for rapid earnings growth, it could slow investment in the sector and affect related industries such as engineering and construction.