The cost of borrowing adjusted for inflation, as measured by market indicators in major economies, has jumped to its highest levels in over a decade. This surge, driven by increased bond issuance from artificial intelligence companies and governments, is intensifying risks for both stock markets and the global economy.

The real yield, which represents the return bond investors demand above inflation, serves as a key gauge of actual borrowing costs for governments and corporations. It is typically influenced by expectations for economic growth, interest rates, and the supply and demand for money.

Real Yields Hit Decade Highs

The 30-year real yield on US Treasury Inflation-Protected Securities (TIPS) has risen above 3%, nearing its highest level since the 2008 financial crisis. The 30-year nominal Treasury yield has also broken above 5.2%, a level not seen since 2007. The US 10-year Treasury yield recently climbed to around 4.75%, an 18-month high.

This trend is not isolated to the United States. The real yields on 10-year government bonds in the UK and Germany are also trading near their highest levels in over a decade. The UK 10-year yield briefly hit roughly 5.14%, its highest since July 2008, while the German 10-year yield climbed to about 3.12%, a peak not seen since May 2011.

The real yield is the "true" cost of borrowing after removing the impact of inflation and is a critical measure of financing pressure for both governments and corporations. In contrast to rising real yields, inflation expectations, as measured by the break-even rate, remain stable at around 2.4%. This indicates that the recent increase in nominal yields has been driven almost entirely by real yields, not a worsening of inflation outlook, despite ongoing geopolitical tensions such as the Iran conflict.

Investors and analysts point to the surge in borrowing by AI "hyperscalers" as a primary factor pushing yields higher. This comes at a time when governments are also spending heavily, forcing buyers to demand higher returns to absorb the large influx of bonds flooding the market.

Capital Competition: AI Borrowing and Government Deficits

Data from the London Stock Exchange Group (LSEG) shows that companies like Alphabet, Amazon, and Meta have issued nearly $220 billion in bonds so far this year. This is more than double the $108 billion issued in all of 2025. "The competition for capital has been incredibly intense, and it's unprecedented in recent times," said Vivek Paul, UK Chief Investment Strategist at the BlackRock Investment Institute. "This scarcity of capital is being exacerbated by factors like the accelerating build-out of AI infrastructure, which is reflected in bond yields."

Governments are also continuing to borrow heavily. The US budget deficit is projected to be around 6% of GDP this year, or $1.9 trillion, while France's is at 5% and the UK's at 4%. "In Europe, defence spending, energy security, and infrastructure investment are more significant than AI spending itself," noted Al Cattermole, a Senior Fixed Income Portfolio Manager at Mirabaud Asset Management.

Markets have also priced in expectations for interest rate hikes, which typically push real yields higher, all else being equal. Max Kitson, an interest rate strategist at Barclays, pointed to relatively strong economic growth, particularly in the world's largest economy, the US, as a key factor. He also noted that central banks have stopped buying bonds, a practice that previously helped keep yields lower.

Watching Stocks: The Sword of Damocles Hangs Over the Market

The real yield is a benchmark for the inflation-adjusted cost of borrowing for governments and corporations. For example, if a bond has a nominal yield of 3% and expected inflation is 2%, the real yield is approximately 1%. Analysts say that while inflation expectations sometimes drive nominal yields, real yields have been the more important factor recently.

In theory, higher real yields should make stocks less attractive. Investors can earn higher inflation-adjusted returns from bonds, and the present value of future cash flows from equities becomes less appealing. So far, strong corporate earnings and a resilient economy have pushed stock markets to record highs, temporarily easing these concerns. JPMorgan has raised its earnings expectations for the S&P 500, and data from LSEG's I/B/E/S shows profits for European blue-chip companies are expected to grow at their fastest pace since late 2022.

Matt King, founder of Satori Insights, is less optimistic. He warns that large technology companies are consuming cash and will increasingly turn to credit markets. At that point, rising real interest rates will begin to bite. "We expect real yields to keep rising until they curb the borrowing activity that is driving them up and the risk-on capital rotation that is pushing stock markets higher," he said in a report.

Rising inflation-adjusted borrowing costs can also lead businesses and households to cut back on spending and investment, potentially slowing economic growth. Ashok Bhatia, Chief Investment Officer at Neuberger Berman, noted that US real yields are still below the 3%-4% range he believes would have a significant impact on growth. "The current level is a warning sign. While growth momentum is solid at 1.5% to 2%, it could start to come under threat," Bhatia said. He remains cautious on long-duration bonds due to fiscal policy concerns, while Barclays' Kitson suggested that real yields could continue to climb due to a lack of political will to reduce budget deficits. "The structural factors supporting higher yields are still in place. There's no reason to think they will disappear anytime soon," Kitson concluded.