Treasury Yields at 2007 Highs: AI Capex, a Hiking Fed and a Failed Buyback

The 10-year Treasury yield is at its highest since 2007 and a Treasury buyback could not steady the long end. The Fed is hiking into an investment boom it has started to call a systemic question, so yields fall only when AI spending does, and that is the outcome tech stocks can least afford.

The 30-year Treasury yield crossed 5.5% on Friday for the first time since 2004, and the 10-year touched its highest level since 2007 before closing near 5.16%. A day earlier the Treasury had tried to steady the long end with the first operation under Scott Bessent's expanded buyback programme. It found too few sellers: offered up to $6 billion of 20- to 30-year bonds, it took $4.08 billion, Newsquawk reported.

The easy reading is a deficit-driven buyers' strike. The data have pointed elsewhere for weeks, and BlackRock said as much on September 21: the rise is mostly real rates and tighter policy expectations, with little from the term premium. The Fed chair has named the cause. "The so-called hyperscalers are out in the market raising funding… the competition for capital is real. And I think it partly explains the increase in yields," Kevin Warsh said after the September 16 meeting. The long end is pricing the AI build-out as a macroeconomic force the Fed has decided to lean against, and the buyback showed that Washington has no supply lever able to cap it. Long yields will come down when capital spending does, and that is the outcome most damaging to the stocks that most need lower yields.

The Fed's own figures show where the move sits. Since early March the 10-year yield has risen about 110 basis points, and the inflation-protected 10-year yield rose almost exactly as much, from 1.76% to 2.85%, while the 10-year breakeven barely moved. The New York Fed's term-premium model attributes about 93 basis points of the rise to the expected path of short rates and 11 to the term premium. A strike by bond buyers would show up in the term premium. It has not.

A Fed hiking into a boom

At that meeting the Fed raised rates by a quarter point to 3.75% to 4.00%, its first increase since 2023. The median projection shows one more increase this year, and the median estimate of the neutral rate, the level that neither speeds nor slows the economy, edged up to 3.25%. Swaps go further, Bloomberg reported, fully pricing three quarter-point hikes over the next year, which would take the target range to 4.75% to 5%. A higher neutral rate is the whole argument in one number: officials now think money has to cost more for good.

The officials doing the talking tie the hikes to investment. New York Fed President John Williams said on Thursday that another increase by year-end was reasonable, pointed to strong demand from AI, and said expectations for real rates explain a large part of the rise in yields. Cleveland Fed President Beth Hammack, a voter this year, was blunter on Friday. "The biggest risk that I see with inflation right now is that an inflationary mindset could start to set in," she said. She expects that "capital expenditures will pressure inflation for a while," and added: "We need to make sure that policy is at a restrictive stance to help bring things back down to target."

Consumers are giving her grounds. The University of Michigan's final September survey put year-ahead inflation expectations at 4.6%, up from 4.0%, and long-run expectations at 3.4%. Market breakevens have stayed flat because investors trust the Fed to keep tightening. Higher real rates are the price of that trust.

How AI spending sets the price of money

The largest US cloud companies are on track to spend close to $800 billion on capital projects this year, and forecasts for 2027 exceed $1.1 trillion, according to Fortune. More of it is now financed in the same market as the Treasury. BlackRock estimates that AI and data-centre companies account for about 14% of US investment-grade bond issuance this year, against 5% in 2025 and 1% over the previous decade. "Heavy government borrowing and the AI buildout are intensifying competition for capital," the firm wrote.

That is why the buyback fell flat, in a week when a seven-year auction tailed by the most since March, a day after a weak five-year sale. Retiring long bonds trims supply at the margin, and supply shows up in the term premium, which accounts for a small slice of this move. No buyback can change the policy path that explains most of it. Bessent's buybacks are broadly seen in the market as having little effect, and some investors argue they add to instability, Bloomberg reported. Thursday's take-up bears that out.

Kansas City Fed President Jeff Schmid added a new worry on Friday. "Where we have to start to really synthesize what's happening in the AI and the data center build-out is are we moving to a too-big-to-fail AI ecosystem," he said, according to Reuters. A central bank that sees the build-out as a possible systemic risk has a second reason to cool it and less appetite to cushion it. Credit markets already show the project risk. After Oracle sent a force majeure notice to the developer of its New Mexico Stargate campus, the $18 billion of debt tied to the project was trading at stressed levels, CNBC reported, citing the Financial Times.

Oil sets the week, capex sets the decade

Oil is the popular explanation, and it has force. Brent is above $100 after seven months of conflict in the Middle East, and US and Iranian negotiators are reported to be discussing a phased deal to reopen the Strait of Hormuz. J.P. Morgan Asset Management argued on September 22 that oil at $70 to $80 could pull global yields back by a third to a half of the sell-off, taking the 10-year to 4.5% to 4.75%.

A deal would take some heat out of yields. Investors are not betting on it: more than half of 173 respondents to Bloomberg's Markets Pulse survey expect the 30-year to reach 6% by year-end. The capital spending is the durable part. It runs on multi-year budgets, and it is what Hammack and Williams named when explaining why they want policy tight. A Hormuz deal might bring the 10-year back toward 4.75%. It would not return it to the 4.15% where it began the year while hyperscalers keep spending at this pace.

What it means for equities

At Friday's close the S&P 500 traded at about 19.4 times forward earnings, according to StreetStats. That is an earnings yield of about 5.15%, level with the 10-year Treasury. Shareholders now rely entirely on growth to beat a government bond, and the most expensive stocks take the compression first.

The 10-year should hold above 5% through the Fed's October 28 decision. The first sustained Treasury rally is more likely to come from late-October earnings calls, if the large cloud companies set 2027 budgets below the $1.1 trillion now forecast, than from a Hormuz deal. If they reaffirm those budgets, the Fed will keep hiking and long-duration tech will have to absorb 5% instead of waiting for it to fall.

Treasury Yields at 2007 Highs: AI Capex, a Hiking Fed and a Failed Buyback

A Fed hiking into a boom

How AI spending sets the price of money

Oil sets the week, capex sets the decade

What it means for equities

Sources

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