AI boom, not oil shock, driving real yields structurally higher
The rise in US Treasury yields is being driven more by advancements in artificial intelligence than by geopolitical tensions or oil price fluctuations. Investors are adjusting their expectations for future growth and productivity, leading to a structural increase in real yields. This shift indicates a departure from the low-growth environment that has characterized the post-2008 financial crisis era.
- ▪Ten-year US Treasury yields are near 4.5%, despite subdued long-term inflation expectations.
- ▪Artificial intelligence is expected to create significant capital demand and productivity growth, pushing real yields higher.
- ▪Major corporations are planning substantial investments in AI infrastructure, indicating a shift in economic dynamics.
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Ten-year US Treasury yields are hovering near 4.5% even though bond markets are showing remarkably little panic about long-term inflation. Oil prices have jumped, conflict in the Middle East has intensified and headlines scream inflation risk daily. Yet the bond market’s own gauges of future price pressures remain relatively subdued. Barclays points out that US 10-year breakeven inflation rates still sit around 50 basis points below the peaks reached during the brutal tightening cycle of 2022. The five-year, five-year forward inflation expectation measure — one of the cleanest indicators of medium-term inflation expectations — now trades near 2.2%. Investors blaming geopolitics alone for higher borrowing costs are missing the bigger shift underway.
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