AI investment is crowding everything else out
Add Axios as your preferred source to
see more of our stories on Google.
Illustration: Brendan Lynch/Axios
Investment into AI is taking up a lot of the oxygen in the U.S. markets, and Wall Street's worries over its crowding-out effect appear to be spreading.
Why it matters: The surge of money flooding into this one sector is helping drive up borrowing costs for everyone — from the U.S. government to non-AI businesses to everyday Americans who face ever-higher rates for mortgages and auto loans.
Where it stands: The yield on the U.S. 10-year Treasury note — a critical benchmark borrowing rate — is at about 5.22%.
- That's up from 4.75% in August — a remarkable rise to levels last seen in 2007.
- "The step higher in global yields since the start of September fueled by the AI boom and energy prices will crowd out many types of non-AI related borrowing," Evercore's Krishna Guha wrote in a note Tuesday.
The big picture: Even as borrowing costs rise, the AI buildout has been unrelenting. The hyperscalers — Amazon, Alphabet, Microsoft, Meta and Oracle — as well as data center and energy companies are borrowing ever-increasing amounts of capital.
- The U.S. stock market, meanwhile, has been surging — foreign investors have plowed cash into equities, fueling record highs.
By the numbers: As of July, foreign net purchases of U.S. corporate bonds are outpacing purchases of U.S. Treasury notes and bonds.
Between the lines: The upshot is that the competition to attract investor money is intensifying.
- "People are like, 'Why should we stick our money in government debt when we can just pile into the equity market?'" Yesha Yadav, a professor of law at Vanderbilt who specializes in Treasury market structure, said in an interview.
- "The Treasury market is having to compete really hard against these other spaces."
The intrigue: In a normal time, the rise in rates would dampen investment. Companies would pull back on borrowing money as it became more costly to do so.
- But AI appears to be less sensitive to the rise in interest rates.
What they're saying: "AI's rate-insensitive boom is triggering 'Dutch disease' in the U.S. economy by draining capital, power and labor from vulnerable sectors like housing and autos," Apollo's Torsten Slok wrote last week.
- He's referring to a term coined in 1977 by The Economist to describe how the discovery of a huge natural-gas field in the Netherlands drove up the value of the country's currency and then caused an overall decline in the manufacturing sector in the country.
- It's a shorthand way of saying one sector is overshadowing everything else.
Yes, but: There are some signs that the AI borrowing binge is slowing. Global AI-debt issuance in September was $23 billion, nearly half of August's level and below June's record $113 billion, the Financial Times recently reported from Morgan Stanley data.
What to watch: "The spike in interest rates is a classic spike at the end of a private investment boom," Liaquat Ahamed, the author of "Lords of Finance" and "1873" — two histories of global economic depressions — said in a recent interview.
- "We've had four or five of these private investment booms in U.S. history, and they've all ended the same way. They all push up interest rates, which then causes a series of defaults."
