AI Is Hurting and Helping the Stock Market Contributing to Soaring Bond Yields

Wall St signage hangs at the New York Stock Exchange. ( ANGELA WEISS/AFP via Getty Images)

The stock market has struggled over the past month in no small part due to soaring bond yields. While buoyancy has come from technology names exposed to AI, there is reason to believe that AI is also contributing to elevated yields—hurting the stock market while also helping it.

The benchmark 10-year U.S. Treasury yield rose at the fastest pace this century in the third quarter, with much of the advance coming in late August and through September. The note’s yield popped from around the 4.6% mark to above 5.3%, the highest level in 24 years, sitting at 5.23% on Friday.

Other Treasury notes have also seen their yields surge, but the rise has been concentrated in longer-dated notes, like the 30-year, also near 24-year highs, while shorter-dated Treasuries like the 2-year and 5-year have seen more muted advances. Corporate bond yields have also followed benchmark Treasury yields higher.

Surging yields on longer-dated Treasuries have heaped pressure on the stock market. Higher borrowing costs make bonds more attractive and can reduce the value of future earnings underpinning equity valuations.

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As the 10-year yield has marched higher, the S&P 500 has languished, with the stock market index flat over the past month.

One of the saving graces for stocks has been technology names outperforming: consider Nvidia and Microsoft , both up near 3% in the last month, or Meta Platforms , which has ripped more than 20% higher. Tech has remained buoyant helped by continued optimism over AI, including share buybacks made possible by massive stock gains this year.

But while AI has no doubt propped up the stock market, it could also be hurting by contributing to higher bond yields, according to research published this week by ING.

About 20% of the rise in longer-dated rates can be attributed to the influence of AI, analysts at ING wrote in a research note on Thursday. Their thesis relies on three pillars: spending, capital markets, and productivity.

For one, AI spending is contributing to increases to U.S. gross domestic product (GDP), and when GDP moves higher, yields usually follow, with investors demanding higher returns on bonds when growth is rising.

“AI accounts for a third of current economic growth. The link here with rates is the tendency for higher growth to be loosely associated with higher rates,” the team at ING wrote.

There’s also the matter of capital markets, which is more complex, the ING group said.

In essence, corporates are increasingly issuing debt to fund AI expansion, denting demand for government debt, which can push yields higher.

Corporate issuance in dollar terms sits at $878 billion so far this year, exceeding issuance in every year from 2021 to 2024 and 54% higher than by this point last year—and tech, media, and telecoms is leading the issuance.

“In other words, long-dated issuance pressure has been skewed toward corporates and away from U.S. Treasuries. We’d not consider this in any way destabilizing. But it’s absolutely a factor to take into account,” said ING.

Then comes productivity. Expectations are sky-high that AI could bring about a productivity revolution, which has a bearing on rates.

“The theoretical chain here is from higher productivity to higher expected return on capital to higher investment spending financed through higher issuance, in turn commanding higher real rates,” said ING.

ING roughly attributes 5% of AI’s contribution to higher rates to spending boosting GDP, with 25% a result of increased long-dated corporate issuance, and 70% from the productivity element.

Of course, AI is just one piece of the puzzle for investors trying to parse the remarkable rally in bond yields in recent months.

“AI is not the only influencer for long-dated rates,” said ING. “In fact, we’d argue that two other drivers—inflation and fiscal deficits—have been more impactful.”

Write to Jack Denton at jack.denton@barrons.com

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