AI bond sales and fiscal deficits push real yields to multi-year highs

Inflation-adjusted borrowing costs across major economies have surged to their highest levels in more than a decade, driven by an unprecedented surge in bond issuance from artificial intelligence companies and heavy government spending. Real yields, which represent the return investors demand above inflation, are now serving as a critical indicator of true borrowing costs for both corporations and sovereigns. According to LSEG data, U.S. 30-year real yields are hovering near 18-year highs at approximately 3%, while British and German 10-year real yields are trading at their highest levels in over ten years.

The primary driver of this yield escalation is the massive capital expenditure required for the AI build-out. Major technology firms, including Alphabet, Amazon, and Meta, have issued nearly $220 billion in bonds this year alone, a figure that already exceeds the $108 billion issued for the entirety of 2025. Vivek Paul, UK chief investment strategist at BlackRock, described the resulting competition for capital as relatively unprecedented in recent times, noting that the acceleration of the AI build-out is intensifying capital scarcity and pushing yields higher.

Government borrowing continues to compound the pressure on bond markets. The U.S. budget deficit is projected to run at around 6% of GDP, or $1.9 trillion, this year, with France and Britain running deficits of 5% and 4% respectively. Al Cattermole, senior fixed income portfolio manager at Mirabaud Asset Management, highlighted that in Europe, drivers such as defence spending, energy security, and infrastructure investment are exerting more influence on borrowing than AI spending specifically. Additionally, Barclays strategist Max Kitson pointed out that central banks are no longer purchasing bonds, a factor that had previously helped suppress yields.

While equities have so far remained resilient, supported by strong corporate earnings and resilient economic growth, analysts warn that rising real yields pose a significant threat to market valuations. Higher real yields reduce the relative appeal of stocks by offering better inflation-adjusted returns on fixed income and lowering the present value of future corporate cash flows. Matt King, founder of Satori Insights, cautioned that major tech companies are burning through cash and will increasingly rely on credit, at which point rising real rates will begin to impact their financial health.

Ashok Bhatia, chief investment officer at Neuberger, estimated that U.S. real yields would need to reach the 3% to 4% range to significantly impact economic growth, though he viewed current levels as a warning sign for an economy currently growing at 1.5% to 2%. Kitson added that structural factors, including a lack of political appetite to reduce budget deficits, suggest there is no reason to believe yields will retreat anytime soon, potentially choking off the borrowing that has been driving both market activity and economic expansion.