Ruchir Sharma Warns 5% Treasury Yield Floor Could Pressure AI Spending
The 10-year Treasury yield closed Monday at 5.21%, its highest level since 2007, while AI-related spending is being supported by debt and equity issuance.
Ruchir Sharma warned that a 5% floor under long-term Treasury yields could increase funding pressure on AI-related spending as stocks show signs of weakening beneath a steady index.
The 10-year Treasury yield closed Monday, Sept. 28, at about 5.21%, its highest level since 2007 and a 19-year high. Sharma, the former Morgan Stanley chief strategist and chairman of Rockefeller International, said the level could mark a break from the low-rate environment that supported the AI boom.
Yields on 10-year Treasurys generally peaked between 5% and 5.25% over the past two decades, Sharma said. If the range shifts to 5.5% or 6%, the broader interest-rate environment would move higher and increase pressure on companies dependent on borrowing and stock issuance.
A historical review cited by Sharma found that stock performance and bond yields become negatively correlated once yields rise above 5.25%. Higher yields then weigh more heavily on equities. Similar behavior has appeared in recent weeks even before the benchmark reached that threshold, he said.
The financing demands of the AI sector are adding to the pressure. SoftBank completed an $11.1 billion high-yield bond sale last week, with dollar-bond yields ranging from 9% to 10%, to help fund its third $10 billion investment in OpenAI.
Sharma said AI already shows several characteristics of a bubble, including high valuations, concentrated ownership, heavy leverage and excessive investment. Those indicators can show whether a bubble exists, he said, but not when it will break. He also said rising interest rates had ended every major boom over the past 300 years.
Market breadth has weakened even as the main index remains relatively stable. The S&P 500 has gone 41 consecutive trading sessions without a daily decline of more than 1% and remains about 1% below its record high. Its median constituent, however, is about 15% below its 52-week high, while about 45% of S&P 500 companies have negative beta values.
Sharma said the key risk is whether stress in the government bond market spreads to corporate credit. Yields on CCC-rated junk bonds have shown signs of stress, although the pressure is not yet widespread. If yields remain above 5% long enough, credit-market strain could build and constrain spending supported by debt and equity issuance.
