Treasury yields dip as AI debt worries shake investor confidence

As the new trading week begins, Treasury yields remain well off their recent highs. The 10-year note is hovering just under 5%, even though the inflation outlook has not shifted and oil prices climbed last week on ongoing Middle East tensions. Despite the drop in yields, tech stocks had a tough week — the Nasdaq recorded its first consecutive weekly declines since July.

That development may seem contradictory. Lower bond yields are typically seen as a positive for technology shares, are they not?

Under normal circumstances, that holds true. But last week’s moves likely had more to do with where investors wanted to park their money. The key question is whether that pattern will persist in the weeks ahead.

Let’s step back and take a simpler view.

Consider a scenario where you have $100,000 to lend. One borrower is the U.S. government, widely regarded as a relatively safe — if not the safest — option. The alternative is a technology firm spending billions on data centres, hoping those investments turn a profit down the line.

A few months ago, investors might have been keener on the latter. But with mounting concerns over the vast debt funding the AI boom, some are understandably turning more cautious. That caution is showing up in the bond market.

Ten-year Treasury yields have slipped back toward 5% even as oil prices stay elevated and inflation worries persist. One factor could be a flight to the perceived safety of government bonds. When demand for Treasuries rises, their prices increase and yields dip.

In my view, traders should focus on where the money is flowing. Alongside a greater appetite for holding government debt over the past week, we are seeing far more cautious conditions for lending to companies with heavy exposure to the AI wave.

How can we observe that? Some of that unease shows up in credit default swaps (CDS), which gauge what investors are willing to pay for protection against a company defaulting on its debt.

Take CoreWeave as an example. Its five-year CDS jumped above 1,000 basis points earlier this month. Oracle’s CDS, meanwhile, has edged close to 300 bps. Simply put, investors are demanding much more compensation for taking on the risk of lending to these firms.

A figure of 1,000 bps may seem modest, but consider it in dollar terms. To insure $1 million of CoreWeave’s debt against default, the annual cost at that level would be roughly $100,000 — around 10% of the protected amount, every year.

Seen in dollar terms, that becomes an extremely expensive insurance premium. And it highlights just how worried investors have grown about the company’s ability to service its debts.

For comparison, Oracle’s 300 bps would cost about $30,000 annually for the same $1 million of protection. That is much less than CoreWeave’s cost, but still a marker of rising discomfort.

Given the sums these tech companies are pouring into AI infrastructure, it is easy to see why investors are starting to ask pointed questions. Building data centres is one thing; earning enough profit to repay all that borrowed money is quite another.

None of this means the AI boom is unravelling. Demand for AI infrastructure remains strong and investment is still flowing in. Yet it is increasingly clear that investors are becoming more discriminating about which companies can justify those outlays and, perhaps more importantly, which can afford to keep spending.

So how does this connect to falling Treasury yields?

What we may be seeing are early signs of a shift in market sentiment. That does not mean investors are shunning risk entirely. But they may be growing less comfortable with certain types of risk — particularly where heavily indebted AI companies are involved.

If that trend continues, it could create a tricky environment for tech stocks. Typically, lower Treasury yields provide some support to valuations. But that benefit could be overshadowed by rising worries about corporate debt, financing costs and future profitability.

To put it succinctly, there is a big difference between yields falling because investors expect lower borrowing costs and yields falling because they are getting more nervous about where else to put their money. Right now, the latter looks to be playing some role in the broader market picture.