From "Higher for Longer" to "Structurally Longer": Oil Price Shock Coupled with AI Debt Issuance Frenzy, Financial Markets Welcome a "New Normal" of 5% Treasury Yields

Title context: From "Higher for Longer" to "Structurally Longer": Oil Price Shock Coupled with AI Debt Issuance Frenzy, Financial Markets Welcome a "New Normal" of 5% Treasury Yields Text: The impact of Middle East geopolitical conflicts on energy transportation is being transmitted to global long-term financing costs through inflation expectations and monetary policy tightening expectations. This is why the 10-year U.S. Treasury yield, known as the "anchor of global asset pricing," along with longer-dated government bond yields, has continued to climb to historic highs not seen in nearly two decades. After seizing the port of Mokha and Perim Island, Houthi forces further took control of the Greater and Lesser Hanish Islands, expanding their influence over the Bab el-Mandeb Strait and Red Sea shipping lanes. Meanwhile, Saudi Arabia's East-West oil pipelinetasked with bypassing the Strait of Hormuzwas attacked and shut down. Reuters reported on September 17 that three pumping stations on the pipeline were damaged; it had previously transported approximately 4 million to 5 million barrels of crude oil per day. However, the latest energy market supply situation does not mean both straits have completely halted transportation or that international oil prices are in a sustained one-way rally. As expectations improved for a partial resumption of Saudi oil shipments, Brent and WTI crude closed at $104.82 and $101.91 respectively on September 17, falling for a second consecutive day but remaining above $100 per barrel. For global bond markets, the key is not just the daily rise or fall of oil prices, but how long high energy costs will persist and whether they will further feed into transportation, production, and consumer prices. The Fed's rate hike landing can ease market doubts about the central bank's determination to fight inflation, but it cannot single-handedly reverse the structural repricing of global long-term bonds. On September 16, the Federal Reserve raised rates by 25 basis points, lifting the federal funds rate target range to 3.75%4.00%, implementing its first rate hike since 2023. A day earlier, the 10-year U.S. Treasury yieldthe "anchor of global asset pricing"had touched approximately 5.04%, a new high since 2007, while Japan's 10-year government bond yield also rose to about 3.04%, a 30-year high. Long-end pressure is also reflected in Japan's 30-year government bond yield approaching historic highs and the U.K.'s 30-year gilt yield rising to its highest level since 1998. From a pricing mechanism perspective, central banks can influence future inflation and short-term rate expectations through rate hikes, but long-term yields also include the compensation investors demand for bearing duration risk. Therefore, "policy re-tightening" and "long-term bond yields remaining elevated" can coexist, and the former does not necessarily mean the latter will continue to rise in a disorderly manner. High yields may become a new normal, fundamentally because the global bond market is shifting from "abundant savings chasing scarce safe assets" to "ever-increasing bond supply seeking buyers who care more about price." Government deficits and debt refinancing are expanding supply, while central banks reducing bond holdings means more securities need to be absorbed by private investors. ECB Executive Board member Isabel Schnabel summarized this shift as moving from "global savings glut" to "global bond glut," noting that increased government bond supply is reducing the convenience yield derived from their scarcity. The total U.S. national debt has exceeded $40 trillion, and sustained fiscal financing needs constitute an important backdrop to this change. Private buyers who care more about price need higher yields to be compensated for holding long-term bonds, and changes in pension systems have also weakened some traditional long-term buying. Understood this way, the "new normal of high yields" is not a prediction that yields will only rise and never fall, but rather that the liquidity-rich environment of near-zero interest rates for an extended period after the COVID-19 pandemic is no longer suitable as the default benchmark for all asset valuations. Long-term bonds once again offer a more attractive yield starting point, while the stock marketcompared to the period of powerful liquidity from global central banks' "flooding the market" after the pandemicneeds to rely more on operating earnings and cash flows to support value. AI Debt Issuance Wave Joins the Competition for Capital: How the AI Computing Investment Boom Affects the Long-Term Yield Curve AI infrastructure construction is transforming tech giants from investors relying primarily on operating cash flow into significant fundraisers in the global bond market. In research published by Vanguard on August 19, the five major hyperscalersGoogle parent Alphabet, Amazon, Meta, Microsoft, and Oracleissued an average of approximately $35 billion in debt annually from 2020 to 2024, increasing to $93 billion in 2025 and reaching approximately $132 billion in 2026 as of the time of their statistics. The full-year AI-related debt issuance forecast covering a broader ecosystem including chip companies, data center developers, and utilities reached approximately $300 billion to $570 billion. It is worth noting that the latter is a full-year forecast range, not the amount already issued. Specific transactions also show that financing maturities are extending toward the long end: Alphabet's $25 billion dollar-denominated note offering announced in August included long-term bonds maturing in 2056 and 2066. Research published by the ECB on August 31 further pointed out that large U.S. tech companies already account for nearly 10% of total new euro-denominated non-financial corporate bond issuance. AI capital expenditure is therefore not just a growth theme for the stock market but is also becoming new supply that global fixed-income markets need to continuously absorb. The connection between AI debt issuance and long-end U.S. Treasury yields is primarily marginal capital allocation competition, rather than every dollar borrowed by tech companies necessarily draining a dollar from the U.S. Treasury market. Deducing from asset allocation mechanisms, for investors able to adjust holdings between Treasuries and high-grade corporate bonds, tech company long bonds offer credit spreads and new allocation options. When governments and corporations simultaneously expand long-term financing, the market needs to adjust through yields and spreads to attract capital to absorb the new supply. However, the credit risk, collateral function, and regulatory uses of the two types of bond assets differ, so substitution is not complete. Institutional investors recently interviewed by media also unanimously agreed that the direct crowding-out effect of tech debt issuance on the U.S. Treasury market's capital pool is limited, and monetary policy and inflation expectations remain important drivers. More direct evidence first appeared within credit bondssome statistics show that the yields and spreads on newly issued bonds from certain large tech companies are higher than those on older bonds with similar risk characteristics from the same issuer, reflecting that concentrated supply requires additional price compensation. Therefore, the AI financing wave can be viewed as a structural incremental factor supporting long-term capital demand, but cannot be identified alone as the entire reason for U.S. Treasury yields breaking through 5%. Growth-oriented investment opportunities linked to AI computing and AI applications themes and higher capital costs may coexist over the long term, and tech companies able to convert capital expenditure into profits and cash flow will be better positioned to support their own valuations. Why Do High Government Bond Yields Appear to Be Becoming the New Normal? From "Higher for Longer" to "Structurally Longer," Global Long Bonds Reprice As investors demand more compensation before they are willing to hold longer-dated debt, borrowing costs for governments around the world have been climbing. Rising U.S. bond yields even prompted Treasury Secretary Scott Bessent to announce an expansion of long-term Treasury buybacksbut this intervention failed to prevent the 10-year U.S. Treasury yield from breaking through 5% and touching its highest level in nearly two decades. Investors retreating from long-term sovereign bonds are driven by a series of concerns. These include widening fiscal deficits and persistently high inflation amid rising energy costs caused by President Donald Trump's trade war and Middle East conflicts. At the same time, tech companies issuing massive debt to build AI infrastructure is forcing governments to compete with them for investor attention. Although the Fed's September rate hike eased some market doubts about the central bank's determination to contain inflation, the structural factors driving the bond selloff have not disappeared, and yields remain elevated. The average bond yield across G7 countries has reached its highest level since 2000. As shown in the chart above, government long-term borrowing costs have risen substantiallydeveloped nation 30-year sovereign bond yields are shown in the figure. What Makes Long-Term Bonds Special? Bonds issued by wealthy nations are widely regarded as the world's safest securities because these governments are highly likely to repay investors principal and interest. Governments typically lock in financing costs over extended periods, such as 30 years. Some countries even issue bonds maturing a century later. But that does not mean these bonds are risk-free for investors. If inflation and short-term rates rise, they erode the real value of bond coupon payments and the real value of principal ultimately repaid at maturity. The longer the bond's maturity, the longer inflation has to exert its effect. This is why long-term bonds are more sensitive to rising rates and inflation, and why they are at the center of the recent selloff. In mid-September, 30-year U.S. Treasury yields touched their highest level since 2007, Japanese government bond yields of the same maturity approached historic highs, and U.K. gilt yields of the same maturity reached their highest since 1998. With Yields This High, Wouldn't Investors Want to Buy Long-Term Bonds? In theory, yes, but the supply-demand dynamics of the bond market are also undergoing structural changes. For most of the past two decades, abundant global savingsespecially Asian savingschased a relatively scarce supply of safe assets, helping to push down long-term real yields. Then-Fed Chairman Alan Greenspan once called persistently low long-term yields a "conundrum," because even when the Fed raised short-term borrowing costs, long-term rates remained subdued. Today, governments around the world are increasing spending in areas ranging from renewable energy to defense. The U.S. is increasing borrowing to fund its over $40 trillion national debt and fill annual fiscal gaps; the Congressional Budget Office estimated in August that this gap would reach $2.1 trillion. Trump has proposed paying $5,000 "dividends" to American adult citizens if Republicans retain control of Congress in the November midterm elections, which could further drive up borrowing. While global government debt supply expands, weakening willingness among overseas investors to buy and central banks reducing bond holdings after years of purchases are both constraining demand. ECB Executive Board member Isabel Schnabel described this change as shifting from "savings glut" to "bond glut." This means the investor base is shifting toward price-sensitive private buyers, who typically demand higher compensation before they are willing to hold long-term bonds. Structural changes in pension and retirement systems have also reduced the number of traditional long-term buyers. How Much Premium Are Investors Starting to Demand for Long-Term Bonds? According to a model developed by Bloomberg Economics, the so-called term premium in the U.S.the extra yield investors demand for holding long-term debthas risen by more than 3 percentage points from its COVID-era low. The U.S. has traditionally enjoyed a "convenience yield": because U.S. Treasuries are liquid, safe, and usable as collateral, investors are willing to pay higher prices and accept lower yields. Some argue this privilege has been eroded, citing the growing national debt burden and what they perceive as Trump's erratic policymaking. Others believe such concerns are overstated and that U.S. Treasuries remain the safest debt asset. Why Do Long-End Yields Matter So Much for the Economy? Disorderly bond market selloffs can cause trouble for governments that rely on bond markets to finance fiscal deficitsthe U.K. learned this the hard way after the collapse of Liz Truss's government in 2022. Bessent said earlier this year that the bond market "has toppled more governments than howitzers." Long-term bond yields are the pricing basis for many consumer loans such as mortgages and for corporate debt rates. With years of inflation already making the cost of living harder to bear, rising bond yields could further pressure household borrowers. Savers, however, stand to benefit. This transmission to consumer credit markets is not always direct. In the U.S., 30-year mortgage rates are priced closely off the 10-year Treasury yield, not the 30-year Treasury yield. This is because homeowners tend to pay off mortgages or refinance after closer to 10 years. The 10-year Treasury yield is called the "anchor of global asset pricing" because of its benchmark status in the dollar financing system and in the valuation of medium- to long-term cash flows. The U.S. Treasury market is massive and actively traded, and the dollar is widely used for international financing and reserves, so changes in its yield have cross-market effectsdollar corporate bonds typically reference Treasury yields of similar maturity plus a credit spread, mortgage rates are affected by Treasury and mortgage-backed securities pricing, and stock and real estate valuations are highly sensitive to the discount rate applied to future cash flows. From a theoretical perspective, the 10-year Treasury yield is equivalent to the risk-free rate indicator r in the denominator of the DCF valuation modelan important valuation model in the stock market. When other indicators (especially cash flow expectations in the numerator) have not changed significantlyfor example, during earnings season when the numerator is in a vacuum due to a lack of positive catalystsif the denominator level is higher or persistently operating in the historically extreme high range above 5%, the valuations of risk assets closely linked to AIsuch as tech stocks at historic highs, high-yield corporate bonds, and cryptocurrenciesface the threat of collapse. What Can Governments Do to Address Rising Long-Term Bond Yields? Many governments are tilting their borrowing plans toward shorter maturities. Although short-end yields are currently lower, the shorter maturity of these bonds means they need to be refinanced more frequentlyand may face higher rates when they are. The Bank of England decided to stop selling long-term bonds from its portfolio to ease market pressure; the U.S. took a different approach. The U.S. Treasury announced in August that it would expand buybacks of 10- to 30-year Treasuries to break what Bessent called the market's "fever." But the first round of buybacks was smaller than expected, and yields subsequently continued rising to multi-year highs, with soaring oil prices being one contributing factor. Fundamentally, governments need to convince investors that they can control inflation and fiscal deficits. This may involve a combination of tax increases and spending cuts, measures that are likely to be unpopular with voters. Should Investors Worry About Surging Yields? To some extent, rising yields are good news for bondholders. With stock markets hovering near record highs, rising yields reflect a global economy that is resilient enough to withstand higher borrowing costs. After the global financial crisis, bond yields were near zero due to weak growth prospects. The recent rise in yields can be seen as a normalization back toward pre-crisis levels. The U.S. 10-year Treasury yield is 4.95%, slightly above its average over the past four decades. "People usually very much like to use the phrase 'higher for longer' to describe the current yield pricing curve," wrote Wells Fargo economists Tom Porcelli and Michael Pugliese in an August research report. "We think a more appropriate description is 'normal for longer.'"