Kevin Warsh Says AI Investment by Hyperscalers Is Pushing Up Your Borrowing Costs

Kevin Warsh Links Rising Borrowing Costs to AI Investment

Federal Reserve Chair Kevin Warsh delivered a stark message on Wednesday: the massive AI investment by tech giants is directly contributing to higher borrowing costs1

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for Americans. Speaking after the Federal Reserve raised its benchmark rate by a quarter point to 3.75-4%, Warsh explained that AI's hyperscalers are creating intense competition for capital1

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in bond markets. The 10-year Treasury yield, which influences mortgages, corporate loans, and the federal government's interest bill, recently hit the psychologically significant 5% mark1

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.

Warsh described the rising 10-year Treasury yields2

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as being driven by three primary factors: economic strength, heavy capital investment in AI2

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, and geopolitical risks2

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. He characterized the 10-year as "the most important asset anywhere in the world" and "the risk-free asset upon which every price of virtually every asset in the world is related to"1

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.

Hyperscalers Flood Bond Markets with AI-Related Debt

The scale of AI-related debt1

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issuance has reached unprecedented levels. Companies like Amazon1

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, Microsoft1

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, Alphabet1

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, Meta1

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, Oracle1

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, and Coreweave1

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are borrowing hundreds of billions to build data centers1

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. The five major hyperscalers issued $121 billion in U.S. corporate bonds1

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in 2025, compared with an average of $28 billion a year between 2020 and 2024, according to BofA Securities1

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Morgan Stanley estimates AI-related global debt reached nearly $236 billion just by the end of May, four times the pace of a year earlier1

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. The firm forecasts this figure will approach $570 billion for the full year of 20261

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. Hyperscaler capital spending now runs close to 100% of operating cash flow, with some hyperscalers dipping negative1

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, forcing them to turn to bond markets since they can no longer fund the buildout from profits alone.

Competition for Capital Intensifies Across Markets

The fundamental issue, as Warsh explained, is straightforward: there is only so much money to lend at any given time1

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. When tech giants borrow hundreds of billions for AI infrastructure, they compete with the U.S. Treasury1

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and everyone else for that capital, driving up the price of borrowing. This competition for capital2

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is pushing up borrowing costs across the economy.

Not everyone agrees on the magnitude of AI's impact. Some analysts, including PIMCO, have argued that AI's effect on treasuries is "overstated"1

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, attributing most of the yield rise to the Iran war1

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and repricing of Warsh's willingness to implement rate hikes1

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. MSCI noted that hyperscaler spreads have widened to normal investment-grade levels, rather than trading at near-government quality1

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Federal Reserve Navigates Complex Economic Landscape

Warsh emphasized that rising bond yields reflect economic strength2

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and robust capital investment, rather than persistent inflation concerns2

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or doubts about the Fed's credibility. He pointed to strong productivity growth and economic growth1

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as evidence the economy is strengthening. Geopolitical tensions, particularly the conflict in Iran, also contribute to higher US bond yields1

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, showing up not just in spot oil prices but in the "crack spread" between crude and refined products like diesel.

Notably, Warsh did not cite the federal deficit as a driver of higher yields, despite federal debt surpassing $40 trillion2

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. He maintained that Fed independence means "we stay in our lane"1

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and leaves fiscal policy to Congress. The Federal Reserve2

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has established an internal task force on AI, due to report by year-end, to study "the implications for our future policy conjuncture"1

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Warsh stressed that financial markets inform policymakers but do not dictate decisions2

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. Some investors had worried that leaving rates unchanged could trigger an even sharper rise in bond yields. The AI angle presents both challenges and opportunities: while it drives up borrowing costs now, Warsh remains optimistic that AI will eventually expand the economy's capacity and prove disinflationary1

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