US Treasury yields remain elevated! High borrowing costs continue to batter the US economy as the divergence between the AI investment boom and real economic performance intensifies.

Weeks of US Treasury selling pressure have left Wall Street facing new challenges. Although Friday's unexpectedly weak September US jobs report briefly pushed Treasury yields lower and sparked a rebound in US stocks, the bond market rally failed to sustain itself. With the 10-year Treasury yield holding above 5%, investors are beginning to focus on a question that may matter more than short-term market volatility: if US borrowing costs remain elevated for a prolonged period, what impact will that have on the economy and financial markets? Data released on Friday showed that US nonfarm payrolls rose by only 29,000 in September, with the unemployment rate edging higher. The clearly weak employment performance prompted traders to reduce bets on further Federal Reserve rate hikes. However, Treasury yields subsequently stabilized again, with the 10-year yield still hovering around 5.27% late Friday. Meanwhile, the divergence between major US stock indices and the real economy is becoming increasingly pronounced. Although the housing market remains sluggish, consumer credit costs are climbing, and borrowers with weaker credit profiles face greater financing pressure, strong corporate earnings and the artificial intelligence (AI) investment boom continue to support major stock indices near record highs. Brad Conger, chief investment officer at Hirtle & Co., pointed out that the situation of ordinary American consumers and businesses stands in stark contrast to areas related to AI and capital expenditure. **Treasury Yields Hold Above 5%, High-Rate Pressure Spreads Across Multiple Sectors** Over the past few weeks, Treasury yields have continued to climb, raising concerns about further tightening of financial conditions. Although weak employment data briefly eased selling pressure in the bond market, investors still need to confront the reality that high rates may persist for an extended period. Conger believes that no clear tipping point has yet emerged that would suddenly pressure all assets, but some sectors are already feeling the effects of high rates. He specifically mentioned housing, autos, consumer loans, and credit cards. These sectors are relatively sensitive to changes in financing costs, and rising borrowing rates directly affect consumers' purchasing power and business operations. This pressure is also reflected within the stock market. Although large-cap AI tech stocks continue to support major indices, the breadth of market gains is narrowing, with banking, industrial, and utility sectors performing relatively weakly. As of Friday, the S&P 500 was down 0.3% for the week, while the tech-heavy Nasdaq 100 rose 0.7%, reflecting clear divergence among different sectors. Conger noted that the risk facing the market is not necessarily a sudden breach of a specific yield level, but rather the sustained erosion of demand and profitability in certain sectors caused by high borrowing costs. **AI Capex Boom Supports US Stocks; Tech Giants Less Sensitive to High Rates** Despite the pressure that high rates are placing on some parts of the economy, some Wall Street investors believe that current yield levels may not necessarily hinder further stock market gains. Nancy Tengler of Laffer Tengler Investments said that rising bond yields can sometimes reflect strong economic fundamentals and do not necessarily mean the stock market will be severely impacted. She pointed out that if a company can raise financing at a cost of 5% while earning a 15% to 20% return through investment, continuing to expand investment still makes economic sense. Based on this judgment, Tengler recently increased her holdings in tech stocks such as NVIDIA Corporation (NVDA.US), Micron Technology, Inc. (MU.US), and Meta Platforms (META.US), while also adding to positions in power infrastructure-related companies including GE Vernova (GEV.US), Eaton Corp. Plc (ETN.US), and Quanta Services (PWR.US). A common characteristic of these companies is their ability to benefit from AI infrastructure buildout and related capital expenditure growth. Michael Alfaro, founder of Gallo Partners, also noted that despite elevated borrowing costs, the US private sector's data center investment boom shows no clear signs of slowing. He believes the market is watching for the possibility of slower future job growth and easing energy price pressures, and expects these changes will ultimately help ease inflation. This partly explains why US stocks have been able to remain resilient in an environment of persistently high financing costs. Alfaro remains bullish on select companies related to AI and the aerospace industry. However, the continued expansion of AI capital expenditure has also made US stocks increasingly dependent on a small number of sectors. If returns on related investments fall short of expectations, the market could face new adjustment pressure. **Capital Accelerates into Bond ETFs as Investors Rebalance Asset Allocation** As Treasury yields rise to multi-year highs, investors' asset allocation strategies are beginning to shift. According to data, in September of this year, bond exchange-traded funds (ETFs) absorbed 42% of all ETF inflows, the highest share in more than a year. This shift indicates that as bond yields rise, fixed-income assets are becoming more attractive to investors. Meanwhile, some institutions have begun adjusting their previous underweight strategies in the bond market. Carol Schleif of BMO Wealth Management recently halved her underweight position in investment-grade credit bonds but maintained an overweight stance on high-quality US growth stocks. This means some investors are re-increasing their fixed-income exposure while continuing to hold growth companies with strong fundamentals. However, risks still vary across different bond assets. For borrowers with weaker credit profiles, high rates may increase refinancing pressure, while issuers with higher credit quality typically have stronger financing capacity. Therefore, in the current environment, rising bond yields not only offer investors higher potential interest income but also make credit risk and rate duration important considerations in asset allocation. **Corporate Debt Pressure Manageable in Short Term; Real Test Is How Long High Rates Persist** Max Gokhman of Franklin Templeton Investment Solutions believes the market needs to focus not only on the speed of Treasury yield increases but, more importantly, on what level yields ultimately stabilize at and how long high rates will last. He noted that some borrowers in the US economy are still protected by existing financing arrangements, so the impact of rising rates may take longer to fully materialize. For example, most existing US mortgage borrowers hold fixed-rate mortgages with an average rate of about 4%. By contrast, the rate on newly issued US mortgages has risen to 7.28%, the highest level since late 2023. This means existing homeowners do not currently bear the same high rates as new borrowers, but consumers preparing to buy a home or needing to refinance face significantly higher costs. A similar situation exists in the corporate sector. Data shows that only about 13% of US non-financial corporate debt, roughly $570 billion, will mature by 2027. Since most debt has not yet entered the refinancing stage, companies do not need to immediately re-borrow at current higher market rates. Gokhman believes that for this reason, only when high yields persist for a considerable period will rising borrowing costs potentially cause more significant damage to companies and the broader economy. In terms of investment strategy, he is more focused on bond duration allocation opportunities and relatively cautious on credit bonds. It is worth noting that even if the AI industry needs large-scale financing in the future, its exposure to high-rate shocks may be relatively limited. Gokhman estimates that large cloud computing companies and other AI-related firms may issue approximately $300 billion in bonds. However, he pointed out that many of these companies have investment-grade credit ratings, ample capital, and strong financial strength. As companies race to build computing infrastructure, their financing decisions may be less sensitive to interest rate costs than other industries. As a result, the impact of high rates on the US economy may be markedly divergent: tech giants with strong financial strength can continue to expand investment, while housing, consumer credit, and some small and medium-sized enterprises may face increasing pressure. **Economic Slowdown and Sticky Inflation Risks Coexist; US Stocks and Bonds May Face Dual Pressure** Although some investors believe the US economy can still withstand current rate levels, risks may gradually accumulate if high yields persist. Gokhman believes that a 5% bond yield alone may not be enough to cause immediate severe damage to the economy, but it will further increase the burden on economic sectors already under pressure. He noted that the latest employment data and consumer confidence readings already show some of the pressures facing the economy. More concerning than a high-rate environment is a scenario in which economic growth begins to weaken but inflation fails to fall in tandem. In such a case, the Fed may find it difficult to quickly ease monetary policy, while high bond yields could continue to suppress economic activity and asset valuations. Gokhman specifically mentioned that the Iran war could keep energy prices elevated for a prolonged period, increasing the risk of persistent inflation. To hedge against this possibility, he and his team have recently increased commodity allocations in their portfolios. He believes that if slowing economic growth and stubborn inflation coexist, both stocks and fixed-income assets could come under pressure simultaneously, creating a market environment similar to 2022, with commodities potentially becoming one of the few asset classes offering a safe haven. Overall, although Friday's weak employment data briefly eased selling pressure in the Treasury market, it did not eliminate the risk of prolonged high rates. For Wall Street, the real question is no longer simply whether the 10-year Treasury yield breaches 5%, but how long this level will last and whether the real economy can maintain growth in an environment of persistently high financing costs. While AI capital expenditure continues to support large-cap tech stocks, housing, consumer credit, and financially weaker companies have already begun to feel the strain. If economic growth slows further in the future while energy prices make it difficult for inflation to retreat, both US stocks and the bond market could face a more complex investment environment.