AI and Government Borrowing Fuel Global Yield Surge

Rising spending on artificial intelligence (AI) infrastructure and higher government borrowing are driving up global yields, according to Goldman Sachs. The bank's report notes that companies are raising more debt and equity to fund investment in AI, while governments are increasing borrowing for infrastructure, energy security, and defense.

The report states that the surge in capex spending to fund AI infrastructure has eaten into free cash flow and forced companies to raise more in debt and equity markets. As a result, 30-year government bond yields in Germany and Japan were close to zero as recently as 2022, but have since increased due to higher yields and greater uncertainty around geopolitics and AI.

Capital expenditure by AA-rated issuers rose 65 per cent year-on-year in the second quarter, marking the 10th consecutive quarter in which aggregate AA capex growth exceeded 35 per cent. Companies are increasingly turning to credit and equity markets to fund investment in AI, with US convertible bond issuance reaching USD 135 billion so far this year, with AI-related borrowers accounting for 44 per cent of the total.

Goldman Sachs' credit team has raised its full-year US investment-grade gross issuance forecast by USD 200 billion to USD 2.3 trillion, with AI-related issuers accounting for about a quarter of US investment-grade gross supply this year. The report notes that higher funding costs could put pressure on equities if earnings growth slows.