Please see the below article from Tatton Investment Management discussing how high bond yields are pressuring AI markets, non-AI businesses and French fiscal policy, received this morning – 12/10/2026.
Bond yields put the AI trade on notice
US tech stocks still dominate and lead higher as we start this week, having ended last week’s choppiness positively. Developments involving conflicts in Ukraine and the Middle East are much in the news but the net effects may have offset each other. Oil prices and bond yields are unchanged from the Friday closing level.
Chip manufacturers were rattled by an apparent misreading of OpenAI’s revenue but quickly recovered once the story’s source intervened. The recovery was encouraging, but it’s a reminder that much of investors’ AI optimism rests on poorly understood, industry-specific ‘compute’ metrics.
The fragile mood is partly because equity investors are looking nervously at high bond yields. Investors aren’t yet tempted to swap stocks for bonds, but we might be approaching the ‘hurdle rate’ that changes the equation: 10-year US inflation-linked bonds now yield a government-guaranteed 3.2% above inflation. Anecdotally, we hear that short-term credit instruments are struggling to compete with that offering.
That’s not hitting share prices yet and it might never – considering that the AI growth story promises to deliver much greater returns. But high yields hurt companies in other ways too, most notably now in credit spreads. They’ve risen sharply amid the AI borrowing spree, exacerbated by SpaceX’s $40bn bond issuance. Investors don’t like that AI firms keep borrowing even as costs rise, and there’s a risk that those fears spiral.
Still, underlying credit metrics are healthy: default rates are rising but only mildly. Credit spreads also spiked after 2025’s “Liberation Day” tariffs and the US-Iran war, but quickly recovered. Higher credit spreads put pressure on equity valuations, but we shouldn’t overstate it.
Liquidity conditions are key, and those are influenced by investor sentiment. Geopolitical risks make that sentiment fragile, but the mood should be bolstered by strong expected Q3 earnings. The billions AI firms have borrowed but not yet spent should support liquidity too.
Earnings have outpaced share prices this year, meaning lower valuations. Arguably, markets have already priced in some slowdown. If they’re right, yields should fall. But the tug-of-war over growth and yields means equities need to deliver strong earnings – or stall.
AI crowds out investment
AI stocks keep climbing even as bonds and non-AI equities struggle. Tech firms’ insatiable capital appetite is powering markets and the economy, but it’s also pushing up borrowing costs for everyone else. Some commentators call this ‘crowding out’. Crowding out is typically a charge levelled at governments – the theory that higher government borrowing and spending raises interest rates and prevents private sector firms from investing in their own growth.
Goldman Sachs and Absolute Strategy Research (ASR) downplay the AI crowding-out story. ASR point out that yield rises have been uniform – rather than concentrated on areas with high tech issuance. Instead, ASR blame resilient growth in the face of high energy prices.
We think that misses the point; growth is resilient because of the AI investment boom. The benefits of that growth have been mainly concentrated on tech firms, but the drawbacks (higher rates) are felt everywhere. Outside the US, where AI investment is lower, growth has been much weaker. Even within the US, non-AI businesses are feeling the strain: McDonald’s shares are down more than 30% from February’s peak. The fast-food giant’s consumers are struggling just as its financing costs for new equipment are rising.
This is really just last year’s ‘K-shaped economy’ story wearing a new name: tech does fine, everything else has a harder time. Crowding out is only a problem for those being crowded out, so AI firms and their investors won’t complain yet. But the risk is that this comes back to bite the winners themselves.
AI firms’ borrowing costs jumped last week, suggesting they’re not as rate-proof as assumed. They may therefore have to slow their issuance. That’s normal, but markets’ heavy concentration in a handful of AI names makes any slowdown more dangerous than it should be.
High French bond yields force fiscal discipline
Protestors in France are angry about state underfunding. At the same time, the government wants tighter fiscal policy. That’s about the harsh conditions that high bond yields impose.
France’s fiscal position remains fragile: debt-to-GDP is close to 120%, and the deficit-to-GDP was 5.4% last year. Yields on French government bonds (OATs) have risen sharply, and our measure of fiscal risk (yields compared to bank swaps) is higher for France than other G7 nations. The French public is clearly unhappy with the current tax-and-spend mix, but OAT investors think it’s already too generous. As the FT put it, France is caught “between the bond markets and the barricades” ahead of next April’s presidential election.
We argued before that it’s difficult for French leaders to push for fiscal discipline, so it was interesting to see Marine Le Pen argue for exactly that. She wants a 3% deficit by 2030 and a “golden rule” capping debt at 60% of GDP. Those savings are unrealistic: she’s opposed pension reforms before (the single biggest spend) and her plan for cutting EU payments would likely hurt French farmers. But the pitch itself is significant, signalling a break from the high-spending brand of right-wing populism she’s campaigned on in the past.
We think there’s a shift to fiscal discipline happening across the political spectrum, and not just in France. This doesn’t have to mean spending cuts; tax rises could also close the funding gap. The shift isn’t because Le Pen or others suddenly had a change of heart, but because bond yields are so high. As we see in the UK, the primary impact of fiscal expansion now is to simply raise debt costs, wiping out the benefit of extra borrowing.
Bond investors haven’t had much good news lately, but the effectiveness of bond vigilantes themselves lowers the fiscal risk.
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Marcus Blenkinsop
12th October 2026