Edward Conard

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Upside of Inequality Oxford Unintended Consequences

AI Summary. US inflation-protected Treasury yields have broken above their post-2008 highs, indicating the real cost of capital is rising, while nominal 20- and 30-year Treasury yields remain within their three-year ranges. The article argues an artificial-intelligence-driven investment boom has raised demand for capital, and that corporate debt-to-equity ratios have fallen and interest coverage has surged since Covid.

Tan Kai Xian Gavekal
Date Posted:

Tan Kai Xian argues the rising cost of capital in the US is unlikely to be the reason that non-AI CAPEX is as low as it is, as “healthy profitability has allowed businesses outside the tech hyperscaler sector to fund their capex internally.”

Are rising real yields a sign of an investment boom?

Core argument: Yields on long-term US Treasury inflation-protected securities have broken above their post-2008-crisis highs, while nominal 20-year and 30-year Treasury yields remain within their ranges of the past three years, indicating the real cost of capital in the US is rising.

US real yields are rising. Long-term nominal yields are trending higher, too. But nominal yields on 20-year and 30-year treasuries are still within their ranges of the past three years. In contrast, the yields on long-term US treasury inflation-protected securities have broken above their post-2008-crisis highs. This means the real cost of capital in the US is rising. AI optimism has led to an investment boom fueled by capital that remains relatively cheap compared with the returns on capital. The resulting demand for capital has seen the cost of capital begin to rise. This makes sense in an economic upcycle. And the dynamic could continue for a good while yet; the US is likely nearer the beginning of this growth phase than the end. Corporate debt-to-equity ratios have fallen since Covid, interest coverage ratios have surged, and healthy profitability has allowed businesses outside the tech hyperscaler sector to fund their capex internally.

Takeaways by Macro Roundup® AI

  1. Yields on long-term US Treasury inflation-protected securities have broken above their post-2008-crisis highs, while nominal 20-year and 30-year Treasury yields remain within their ranges of the past three years, indicating the real cost of capital in the US is rising.
  2. AI optimism has driven an investment boom funded by capital still cheap relative to returns on capital, and the resulting demand for capital has begun pushing the cost of capital higher, consistent with an economic upcycle.
  3. Corporate debt-to-equity ratios have fallen since Covid and interest coverage ratios have surged, with healthy profitability allowing businesses outside the tech hyperscaler sector to fund capital expenditure internally.

Related Articles:

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  • Cover Ratios for Hyperscaler Bonds Declining — Investor demand for hyperscaler bond deals has weakened, with the cover ratio — dollars of investor orders per dollar of bonds issued — falling from nearly 5x to below 2x. This suggests investors may require wider spreads to absorb additional hyperscaler bond supply.
  • US Stock Market To Stop Shrinking For First Time In 23 Years — Goldman Sachs estimates that net supply of US equity — new shares issued less shares removed by buybacks and take-privates — will be roughly flat in 2026 after being negative since 2003, with a larger influx expected in 2027 as lock-up periods on this year's initial public offerings expire.
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