AI bond flood pushes real yields to decade highs, threatening stocks

Real yields across major economies have climbed to their highest in more than a decade as AI companies and governments flood markets with debt, raising the risk of a pullback in stocks and slower global growth.

Inflation-adjusted borrowing costs have surged to decade highs across major economies, with U.S. 30-year real yields near 18-year peaks at about 3 percent, as AI companies and governments ramp up bond sales that buyers demand higher returns to absorb.

"There's a competition for capital which is relatively unprecedented in recent times," said Vivek Paul, UK chief investment strategist at the BlackRock Investment Institute. "Because of things like the AI build-out ramping ever up, that capital scarcity dynamic is accelerating and you're seeing that play out in bond yields."

Alphabet, Amazon and Meta have issued almost $220 billion of bonds so far this year, more than double the $108 billion for all of 2025, LSEG data shows. Governments are also borrowing heavily: the U.S. budget deficit is set to run at about 6 percent of GDP, or $1.9 trillion, this year, France's at 5 percent and Britain's at 4 percent.

Real yields are the return a bond investor demands above inflation and a benchmark for the true borrowing costs faced by governments and companies. With inflation expectations broadly steady despite the Iran conflict, the rise in real yields has pushed nominal yields higher across the world in recent months.

The bond flood

"In Europe defence spending, energy security and infrastructure investment are more important drivers than AI spending specifically," said Al Cattermole, senior fixed income portfolio manager at Mirabaud Asset Management.

Markets are also pricing in rate hikes, which all else equal tend to push up real yields. Max Kitson, a European rates strategist at Barclays, pointed to relatively strong economic growth, particularly in the United States, and noted that central banks are no longer buying bonds, something that had previously suppressed yields.

The last time U.S. 30-year real yields traded near current levels was in 2008, before the global financial crisis triggered a collapse in borrowing costs and a sharp equity selloff. That precedent underscores how a sustained rise in real rates can eventually choke off the risk appetite that has carried stocks to records.

Watch out stocks

Theoretically, higher real yields should reduce the relative appeal of equities, since investors can earn better inflation-adjusted returns on bonds while the present value of future corporate cash flows, calculated using yields, looks less attractive.

So far, stocks hitting record highs amid blockbuster corporate earnings and resilient economies have shaken off the worries. JPMorgan has increased its earnings forecasts for the U.S. S&P 500, while LSEG I/B/E/S data showed profits at European blue-chip companies are set to grow at their fastest rate since late 2022.

Matt King, founder of Satori Insights, was less sanguine, saying major tech companies are burning through their cash and will increasingly turn to credit, at which point the rise in real rates will start to bite. "We expect real yields to continue rising until they choke off the borrowing which has been driving them — and the rotation into risk which has been fuelling the equity rally," he said in a note.

Higher inflation-adjusted borrowing costs can also, at a certain point, cause companies and households to cut consumption and investment, slowing growth. Ashok Bhatia, chief investment officer at Neuberger, said U.S. real yields were still below the 3 percent to 4 percent range where he estimated an impact on economic growth. "But today's level is a warning sign that growth, while currently solid at 1.5 percent to 2 percent, could start to be threatened."

Bhatia said he was cautious about longer-dated bonds given concerns about fiscal policy, while Barclays' Kitson said real yields could continue to climb as there is a lack of appetite among politicians to reduce budget deficits. "The structural factors underpinning these increases in yields are still there," he said. "There's no reason to think they're going away anytime soon."

This article is for informational purposes only and does not constitute investment advice.