The surge in corporate investment in AI has created new competition for capital, forcing governments to pay higher interest rates as they vie with companies for a finite pool of available funds.
Inevitably, higher bond yields increase the cost of servicing national debt, diverting public funds from services like healthcare and education to interest payments.
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AI Has Made Borrowing More Expensive – An Expert Explains How Bond Markets Are Changing
By Alex Dryden, PhD Candidate in Economics, SOAS, University of London
The global bond markets are a sensitive lot. And they’ve been having a particularly tricky time lately.
Spooked by high inflation, high interest rates and high levels of government debt across the world, those markets have become less stable over the summer. The prices of government bonds – what governments sell to investors – have gone down. And yields – the amount of interest governments need to pay to those investors over a set period of time – have gone up.
This means it’s now more expensive for governments to borrow the money they need to pay for all the things governments need to pay for.
In the US, for example, the interest rate that investors charge the government for a ten-year bond has risen to 5%, its highest level for almost 20 years. Ten-year borrowing costs in the UK and France are also at their highest levels since before the global financial crisis of 2008.
Some analysts blame governments themselves for this rise because of their persistent budget deficits, where spending outstrips tax revenues, forcing them to lean heavily on bond markets to plug the gap. But budget deficits have been commonplace for years. Neither the UK nor the US has managed to run a budget surplus since 2001. So why are global financial markets only now beginning to react? A big part of the answer lies in an imbalance between the demand for borrowing and the supply of capital available to finance it.
Governments have borrowed heavily from capital markets for much of the past two decades and, until recently, faced relatively limited competition for that capital. But the boom in AI investment is beginning to change this. Companies, particularly in the US, are borrowing heavily – to the tune of trillions of dollars – from financial markets to fund the construction of data centres and investment in AI research and development (plus the infrastructure needed to support it). So governments are no longer the only big borrowers at the table.
And while global capital markets are enormous, the pool of money available to lend is not infinite. As governments and companies compete for that capital, investors can demand a higher return for providing it. The result is higher borrowing costs across the economy – including for governments.
The above is a section of the article ‘AI has made borrowing more expensive – an expert explains how bond markets are changing’. Read the full article on The Conversation HERE.
Note from The Exposé: What happens when the AI bubble bursts? Read:
- AI industry’s circular financing: Is it boom or bust, 10 December 2025
- The AI bubble is bursting, 25 August 2025
- US Treasury draft report warns boom and bust of AI will cause mayhem comparable to the dotcom bubble, 9 July 2026
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