By Harry Robertson
LONDON, Aug 14 (Reuters) – Market gauges of inflation-adjusted borrowing costs have shot to their highest in more than a decade across major economies as AI companies and governments ramp up bond sales, raising risks for stock markets and the world economy.
Real yields are the returns that a bond investor demands above inflation and are an important indicator of true borrowing costs for governments and companies. They are typically determined by expectations about growth, interest rates and the supply and demand of money.
U.S. 30-year real yields, as measured by inflation-linked bonds, are near 18-year highs at around 3%, while British and German 10-year real yields are trading at around their highest in more than a decade.
Investors and analysts say a surge in borrowing by AI “hyperscalers”, at a time when governments are still spending heavily, has been a leading factor pushing up yields, as buyers demand higher returns to keep purchasing the flood of bonds hitting markets.
With inflation expectations broadly steady despite the Iran conflict, the rise in real yields has pushed up nominal yields around the world in recent months.
BOND FLOOD
The likes of Alphabet, Amazon and Meta have issued almost $220 billion of bonds so far this year, already more than double the $108 billion for the whole of 2025, LSEG data shows.
“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.”
Governments also continue to borrow heavily. The U.S. budget deficit is set to run at around 6% of GDP, or $1.9 trillion, this year, France’s at 5% and Britain’s at 4%.
“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, said relatively strong economic growth, particularly in the United States, was an important factor. He also noted that central banks are no longer buying bonds, something which had suppressed yields.
WATCH OUT STOCKS
Real yields are a benchmark for the inflation-adjusted borrowing costs faced by governments and companies.
If a bond pays a nominal yield of 3% and inflation is expected to be 2%, its real yield is about 1%. Sometimes inflation expectations are the main drivers of nominal yields, but recently real yields have been more important, analysts say.
Theoretically, higher real yields should reduce the relative appeal of stocks. Investors can get better inflation-adjusted returns on bonds, while future cash flows, the present value of which are calculated using yields, look 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 that 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%-4% where he estimated an impact on economic growth.
“But today’s level is a warning sign that growth, while currently solid at 1.5% to 2%, 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,” Kitson said.
(Reporting by Harry Robertson; Editing by Dhara Ranasinghe and Kirsten Donovan)
Comments