Rising Treasury yields and a shrinking Fed balance sheet threaten to break the economics of AI-driven capital expenditure as investor demand for debt financing cools.
Rising 10-year Treasury yields could break the economics of AI debt capex if they reach 5.5-6% without growth picking up.
Societe Generale's Kokou Agbo-Bloua warns that 10-year Treasury yields approaching 5.5% to 6% could jeopardize the viability of debt-fueled AI capital expenditure. As the Federal Reserve reduces its balance sheet and foreign buyers retreat, the resulting rise in term premiums and borrowing costs is forcing investors to become increasingly price-sensitive.
AI infrastructure requires massive capital expenditure often funded by debt. If interest rates rise significantly without a corresponding increase in economic growth, the cost of servicing that debt may exceed the projected returns on AI investments.