The artificial intelligence (AI) boom is creating a significant challenge in the bond market, as a surge in AI-related debt is driving long-term borrowing costs to levels not observed since the financial crisis. This situation, characterized by a 5% risk-free rate, is now seen as a potential trigger for unwinding the AI race. The substantial increase in corporate debt, particularly from hyperscalers like Alphabet, Amazon, Meta, Microsoft, and Oracle, which have collectively added about $350 billion to their debt in the last five years to finance data centers, is a primary factor. This fierce competition for capital is leading to higher yields and wider credit spreads, impacting both corporate borrowers and the broader bond market.
The ongoing AI investment, fueled by this debt, is directly competing with US Treasuries for buyers, further contributing to the elevated US yields. The 30-year Treasury yield has recently sustained above 5% for an extended period, a streak not seen since 2007. This sustained high yield is partly attributed to the over $500 billion financing linked to AI, creating a situation where fund managers anticipate these 5%+ yields will persist, unlike previous temporary spikes. Alex Payne, a senior portfolio manager at Vanguard Capital Management, noted that traditional buyers of long-term bonds now have more investment options, suggesting that yields may not have peaked.
This trend poses a significant headwind for the demand for Treasury bonds. As investors increasingly choose high-quality corporate credit tied to the AI sector, this diverts capital away from government debt, allowing Treasury yields to drift higher. The recent $25 billion debt deal from Amazon, for instance, triggered a sell-off in the technology sector, indicating that credit investors are reaching their capacity limits. AI-related bond issuance has already more than doubled last year's total, highlighting the immense and growing demand for capital in this sector. The concurrent rise in long-dated yields, with the 30-year inflation-adjusted yield approaching 3%—a level last seen in 2008— underscores growing concerns about the implications of this debt-fueled AI expansion.
