Gita Gopinath, Harvard professor and former IMF First Deputy Managing Director, warns that AI's enormous capital requirements are a key driver behind rising global interest rates.
“The point is it is in this global phenomenon around the world rates going up… AI and the rate sell-off is kind of connected,” says Gopinath.
AI's massive capital consumption is crowding out sovereign bonds. Despite higher rates, companies are compelled to invest in AI to stay competitive, muting the traditional economic dampening effect of higher borrowing costs.
Public debt levels and inflation expectations are also pushing bond yields higher. Gopinath notes a troubling shift: the marginal buyers of government debt are now more volatile investors like hedge funds, increasing market sensitivity. The US is projected to run nearly 7% fiscal deficits for the foreseeable future.
AI companies now account for 50% of all investment-grade corporate bond issuance this year. Gopinath says “everybody wants to have a piece of the AI boom,” drawing investors away from traditional assets.
Rising oil prices could trigger significant demand destruction. Meanwhile, AI’s build-out is consuming resources like wind turbines and skilled labor, adding inflationary pressure and keeping interest rates higher for longer.