Estimated annual revenue from AI use is about US$200 billion this year, a fraction of the more than US$1 trillion companies are spending on data centres and other infrastructure. AI groups increasingly rely on new bond and equity issues to fund the gap, and a 10-year bond yield of more than 5 per cent will slow both channels. A yield that high will top the earnings yield of the US stock market, which historically has been a headwind for stocks.
Further, if the 10-year yield stays above 5 per cent, the rate the US pays on its debt will soon exceed the expected rate of nominal growth in its economy, making the debt far less sustainable. The pace of the rise matters as well. If it passes the 5 per cent level by November, the 10-year yield will have increased more than 75 basis points within six months. Historically, spikes that sharp have ended bull markets.
Some analysts say this milestone would merely mark a return to an era like the 1990s, which saw strong US growth and stock market returns, with the 10-year yield above 5 per cent throughout. But America was much less addicted to debt then. The decade ended with a US government surplus, and since then the deficit has exploded. Public debt has nearly tripled to 100 per cent of GDP. As a result, debt-servicing costs are much higher now. Rising public borrowing costs will squeeze other borrowers sooner, and hit the bubbly AI markets harder.
Others are raising louder alarms about how America’s debt burden could undermine its superpower status, and dethrone the dollar as the world’s reserve currency. This doom-loop thinking is premature, since America’s major rivals are grappling with similar problems on the debt front. For now, what bears close watching is how quickly the 10-year Treasury yield breaks 5 per cent and the threat that poses to the AI boom.
