Ten-year US Treasury yields are hovering near 4.5% even as bond markets are showing remarkably little panic about long-term inflation.
Oil prices have risen, the conflict in the Middle East has intensified and the headlines scream daily the danger of inflation. However, the bond market’s own gauges of future price pressures remain relatively subdued.
Barclays notes that 10-year US inflation rates still remain about 50 basis points below the peaks reached during the brutal tightening cycle of 2022. The five-year, five-year measure of forward inflation expectations – one of the cleanest gauges of medium-term inflation expectations – is now trading near 2.2%.
Investors who blame geopolitics alone for higher borrowing costs are missing the biggest change going forward. Artificial intelligence (AI) is beginning to push real yields structurally higher.
Bond markets increasingly believe that AI will create strong demand for capital, stronger productivity growth and a materially higher neutral rate across the global economy. Real yields are rising because investors no longer see the post-2008 global financial crisis world of free money forever as sustainable.
For 15 years, developed economies were stuck in a low-growth, low-productivity environment. Corporations invested less, productivity stagnated and central banks flooded markets with liquidity because private sector demand for capital remained weak.
AI is completely changing this equation. Microsoft plans roughly $80 billion in capital spending this fiscal year, mostly related to AI infrastructure. Amazon is expected to spend more than $100 billion.
Alphabet recently raised its annual capital spending guidance to about $75 billion. Meta Platforms plans up to $72 billion next year. Nvidia became the emblem of the AI boom as revenue growth exploded more than 260% year over year during the build phase.
Data centers require huge investments in semiconductors, cooling systems, power generation, transmission networks, fiber networks and physical construction. Goldman Sachs estimates that global energy demand from data centers could increase by as much as 165% before the end of the decade.
Bond markets understand the implications. The boom in large-scale investment increases the cost of capital because the demand for money exceeds the supply. Governments borrow more aggressively, companies compete to secure strategic advantages, and productive opportunities multiply simultaneously across sectors.
AI is already activating all three. Therefore, real yields are rising because investors increasingly believe that future growth will be stronger than markets previously assumed. Productivity gains from AI could reshape finance, healthcare, defense, logistics, manufacturing and software engineering at high speed.
McKinsey estimates that generative artificial intelligence could eventually contribute between $2.6 trillion and $4.4 trillion annually to the global economy. PwC projects AI could add almost $16 trillion to global GDP by 2030.
Bond investors can’t ignore numbers on that scale. Markets have, until now, spent years pricing in permanent stagnation, yet AI is forcing a repricing into expansion. Another factor that receives too little attention: AI can prove inflationary during the construction phase, even if long-term productivity gains eventually hold back costs.
Zoom in and you’ll see that demand for electricity is rising as copper markets tighten. Semiconductor supply chains remain constrained and engineering talent is scarce.
Utility infrastructure requires a major upgrade, and discussions of nuclear power have become mainstream policy conversations, largely because existing networks may struggle to support the projected growth in AI demand.
Shortages put pressure on prices while fiscal conditions exacerbate the problem. The US federal debt held by the public is approaching 100% of GDP, according to projections by the Congressional Budget Office. Refinancing costs continue to rise rapidly. Annual interest payments on the US national debt recently exceeded defense spending for the first time in modern history.
Bond markets notice every part of this equation. Long-term sovereign debt now faces pressure from multiple directions simultaneously: heavier issuance, rising capital requirements, stronger productivity expectations and growing confidence that neutral interest rates can be set well above post-crisis rates.
Investors expecting yields to collapse once oil prices stabilize may be misunderstanding the timing. Artificial intelligence is no longer just a technology story that drives capital excitement. Bond markets increasingly see it as a macroeconomic force capable of reshaping the global cost of money itself.
Financing technological revolutions has never been cheap. And evidence is showing in real time that AI will be no different.
Nigel Green is CEO and founder of DeVere Group
