U.S. Treasury yields remain high! Elevated borrowing costs continue to impact the U.S. economy, AI investment boom intensifies the divergence from the real economy

According to Zhihui Finance APP, the ongoing U.S. Treasury sell-off, which has lasted for several weeks, is presenting new challenges for Wall Street. Although Friday’s U.S. September employment report was unexpectedly weak—temporarily pulling Treasury yields back and boosting U.S. stocks—the bond market rally failed to sustain. With 10-year Treasury yields holding above 5%, investors are shifting their focus to a potentially more significant question than short-term volatility: if U.S. borrowing costs remain elevated for an extended period, what consequences will the economy and financial markets face?

Data released on Friday showed that U.S. nonfarm payrolls in September increased by only 29,000, with the unemployment rate rising slightly. The clearly weak job performance prompted traders to scale back bets on further Fed rate hikes. However, Treasury yields later stabilized again, with the 10-year yield lingering around 5.27% by Friday’s close.

Meanwhile, there is a growing divergence between the performance of major U.S. stock indices and the real economy. Despite a persistently weak housing market, rising consumer credit costs, and higher refinancing pressures for weaker-credit borrowers, robust corporate earnings and the AI investment boom continue to support major stock indexes near historical highs.

Brad Conger, Chief Investment Officer at Hirtle & Co., pointed out the sharp contrast between the conditions of typical U.S. consumers and businesses and those of sectors tied to AI and capital expenditures.

U.S. Treasury Yields Stay Above 5% — High Interest Rate Pressures Spread Across Sectors

In recent weeks, Treasury yields have been climbing persistently, stoking concerns over further tightening of financial conditions. Although weak jobs data briefly eased selling pressure in the bond market, investors must still confront the reality that high rates may persist for an extended period.

Conger believes a clear tipping point that would suddenly pressure all asset classes has not yet emerged, but several industries have already begun to feel the impact of high interest rates. He specifically mentioned housing, automotive, consumer loans, and credit cards. These sectors are highly sensitive to financing cost fluctuations; rising lending rates directly impact consumer purchasing power and business activities.

This pressure is also reflected within the equities market. Despite large-cap AI tech stocks continuing to prop up the main indices, the breadth of the stock market’s rally is narrowing, as sectors such as banks, industrials, and utilities lag behind. As of Friday, the S&P 500 had fallen 0.3% on the week, while the tech-heavy Nasdaq 100 rose 0.7%, reflecting clear divergence across different sectors.

Conger noted that current market risks may not necessarily stem from yields breaching some specific threshold, but rather from the continual erosion of demand and profits in certain industries amid persistently high borrowing costs.

AI-Driven Capital Expenditure Boom Supports U.S. Stocks— Tech Giants Less Sensitive to High Rates

Despite high rates pressuring parts of the economy, some on Wall Street believe current yields may not necessarily hinder further gains in the equity market.

Nancy Tengler of Laffer Tengler Investments stated that rising bond yields can at times reflect a robust economic backdrop, and do not inevitably spell major trouble for the stock market. She pointed out: if a company can borrow at 5% and deploy capital for a 15-20% return, it’s still rational to keep investing.

Based on this view, Tengler recently increased holdings in technology stocks such as Nvidia (NVDA.US), Micron Technology (MU.US), and Meta Platforms (META.US), while also boosting allocations to energy infrastructure names like GE Vernova (GEV.US), Eaton (ETN.US), and Quanta Services (PWR.US).

These companies share the ability to benefit from growth in AI infrastructure and related capital spending.

Michael Alfaro, founder of Gallo Partners, also pointed out that despite high borrowing costs, the data center investment frenzy in the U.S. private sector shows no clear signs of abating. He believes the market is watching for a possible slowdown in future job growth and easing energy price pressures—developments that could eventually help bring inflation down. This partly explains why U.S. stocks remain resilient despite persistently elevated funding costs.

Alfaro still favors select businesses linked to AI and aerospace. However, the ongoing expansion of AI-related capital expenditure means the market is becoming even more dependent on a handful of sectors. Should returns on such investments fall short of expectations, the market may face new adjustment pressures.

Funds Accelerate Flow into Bond ETFs as Investors Realign Asset Allocations

With U.S. Treasury yields hitting multi-year highs, investors’ asset allocation strategies are changing too.

Data show that in September this year, bond ETFs absorbed 42% of all ETF inflows—the highest share in more than a year. This shift suggests that as bond yields rise, fixed-income assets are becoming increasingly attractive for investors.

At the same time, some institutions have started to scale back their previous underweight positions in bonds. Carol Schleif of BMO Wealth Management recently cut her underweight to investment-grade corporate debt in half, though she still maintains an overweight position in high-quality U.S. growth stocks. This indicates that some investors are selectively re-adding exposure to fixed income while still holding fundamentally strong growth names.

However, risks still vary among different bond assets. For weaker-credit borrowers, high interest rates may raise refinancing risks, while issuers with higher credit quality generally retain more robust funding capacity.

Therefore, in the current environment, rising bond yields offer investors higher potential interest income but also make credit risk and duration more important considerations in asset allocation.

Short-Term Corporate Debt Risks Manageable—True Test Is How Long High Rates Last

Max Gokhman of Franklin Templeton Investment Solutions believes the market’s focus should not only be on the speed of yield increases, but more importantly on where yields ultimately settle and for how long high rates persist. He points out that some U.S. borrowers remain shielded by existing financing arrangements, so the impact of rising rates may take time to fully materialize.

For example, most existing U.S. mortgage holders have fixed-rate loans at an average interest rate of around 4%. By contrast, rates on new mortgages have climbed to 7.28%, the highest since the end of 2023. This means current homeowners do not need to shoulder the same high rates as new borrowers for now—but those looking to buy or refinance face much steeper costs.

Corporate America is in a similar position. Data show that only about 13% of U.S. non-financial corporate debt comes due by 2027, totaling roughly $570 billion. Since most debt hasn’t reached the refinancing stage yet, companies need not immediately borrow at today’s higher market rates.

Gokhman believes, therefore, that only if high yields persist for a sufficiently long period will rising borrowing costs start to seriously impact corporations and the wider economy. From an investment strategy perspective, he’s more interested in bond duration opportunities and remains relatively cautious on credit risk.

It’s also worth noting that even if the AI industry needs large-scale financing in future, its exposure to high-rate shocks may be relatively limited. Gokhman estimates that large cloud and AI-related companies may issue around $300 billion in bonds.

However, many of these firms have investment-grade ratings, ample capital, and strong finances. With companies racing to build computing infrastructure, their sensitivity to the cost of funding may be lower than in other sectors.

Thus, the impact of high rates on the U.S. economy may be split: financially strong tech giants can keep investing, while sectors like housing, consumer credit, and some small and medium-sized businesses may face mounting pressures.

Economic Slowdown Risk and Stubborn Inflation Coexist— U.S. Stocks and Bonds Could Face Dual Pressures

Although some investors believe the U.S. economy can withstand current rate levels, if high yields prevail over the long run, risks could gradually accumulate.

Gokhman contends that a 5% bond yield alone may not immediately cause severe damage to the economy, but it does compound the burdens on already-strained segments. He notes that the latest jobs data and consumer confidence measures have already shown some economic distress.

What’s more concerning than simply high rates is the prospect of economic growth slowing while inflation remains sticky. In that scenario, the Fed may be unable to quickly ease policy, and high bond yields could continue to suppress economic activity and asset valuations.

Gokhman specifically mentioned that the Iran war might keep energy prices elevated for a prolonged period, heightening the risk of persistent inflation. To hedge against this prospect, he and his team have recently increased commodity allocations in their portfolios.

He believes that when slowing growth and stubborn inflation coexist, both equities and fixed-income assets could face simultaneous pressure—as in 2022—while commodities may become one of the few asset classes with safe-haven appeal.

Overall, although Friday’s weak jobs numbers briefly eased selling pressure on Treasuries, they have not eliminated the risk of prolonged high interest rates.

For Wall Street, the real issue is no longer merely whether the 10-year Treasury yield breaks above 5%, but how long it stays there—and whether the real economy can continue to grow while funding costs stay elevated.

As AI capital spending continues to buoy major tech stocks, housing, consumer credit, and financially weaker firms have already begun to feel the strain. If economic growth slows further in the future while stubborn energy prices keep inflation elevated, both the U.S. equity and bond markets may face an even more complex investment environment.