The benchmark 10-year Treasury yield briefly exceeded 5% for the first time since 2023, primarily due to spiking oil prices that are threatening to impact debt markets. This 5% threshold is a critical level, as it has historically represented the upper limit for the 10-year yield since the dot-com era, according to Rockefeller International Chairman Ruchir Sharma. He warned that a decisive breach of this level could lead to the popping of the AI bubble.
Such high borrowing costs are expected to negatively affect the AI sector in multiple ways. Hyperscalers, for instance, are likely to issue fewer bonds to finance their massive spending on AI infrastructure. Additionally, issuing new equity will become more challenging, as yields above 5% have historically acted as a headwind for stock performance. This could significantly slow down the rapid expansion seen in AI and data center investments.
Beyond the AI sector, a 5% yield poses broader economic concerns. Ruchir Sharma noted that if yields top 5%, they start to approach nominal GDP growth, which would make the national debt even more unsustainable. This financial strain could exacerbate existing economic vulnerabilities. Societe Generale's head of global asset allocation, Alain Bokobza, echoed these concerns, highlighting 5% as a critical level for equity investors to watch, with 6% being an even more significant point of genuine concern.
Analysts from BNP have also expressed apprehension, predicting "the end of the bull market" as companies increase their debt issuance to fund AI and data center investments. While investors can currently absorb the bond supply, BNP suggests this will soon become a larger issue, potentially leading to oversupply in credit markets. The Bank for International Settlements (BIS) has also stated that the AI-linked market rally of the past two years is showing increasing signs of vulnerability, with investors growing more cautious about the future profitability of AI endeavors.
