Borrowing costs for mortgages, corporate loans, and government debt are facing upward pressure, and Federal Reserve Chair Kevin Warsh suggests that a massive surge in corporate borrowing to fund artificial intelligence infrastructure is a major contributing factor. Following the Federal Reserve’s decision to raise its benchmark interest rate to a range of 3.75% to 4%, attention has increasingly turned to the 10-year Treasury yield, which sits at approximately 5%. While the central bank does not directly dictate this benchmark, market forces have driven yields upward over recent months.
When questioned about the drivers behind these climbing yields, Warsh pointed directly to the bond market activity of major technology firms. According to the Fed Chair, the intense demand for funding from major technology players—frequently referred to as hyperscalers—has intensified competition for available capital. Companies including Amazon, Microsoft, Alphabet, Meta, Oracle, and Coreweave are leaning heavily on debt markets to finance the construction of expensive data centers necessary to power future technological advancements.
Data compiled by BofA Securities highlights the staggering scale of this corporate borrowing. Major hyperscalers issued $121 billion in U.S. corporate bonds last year, a sharp increase compared to an annual average of $28 billion between 2020 and 2024. Furthermore, Morgan Stanley estimates that global artificial intelligence-related debt reached nearly $236 billion by the end of May, running at four times the pace of the previous year. Projections indicate this figure could climb toward $570 billion by the close of 2026.
Capital spending by these technology giants has expanded to nearly 100% of their operating cash flow, with some operations dipping into negative territory. Because profits alone can no longer support the massive scale of these infrastructure buildouts, these organizations are increasingly reliant on the bond markets. This heavy reliance creates a direct competition with the U.S. Treasury and other market participants, naturally pushing the price of borrowing higher.
However, market perspectives on this phenomenon vary. Financial institutions like PIMCO have suggested that the impact of artificial intelligence on treasury yields might be overstated, attributing movements instead to geopolitical conflict and a repricing of interest rate expectations. Additionally, MSCI has pointed out that the spreads for hyperscalers have widened toward normal investment-grade levels, stepping away from the government-quality trading status they held previously.
Alongside artificial intelligence debt, Warsh cited broader economic growth and geopolitics as the other primary drivers behind long-term yield increases. Notably, the Fed Chair omitted the federal deficit from his list of factors, aligning with his stance that fiscal policy remains the responsibility of Congress while the central bank maintains its institutional focus. Meanwhile, the Federal Reserve has established an internal task force dedicated to artificial intelligence, with findings expected to be released by the end of the year to help guide future policy decisions.
Source: Fortune
