Treasury yields have climbed and swung sharply in recent months, but despite the enormous capital flowing into artificial intelligence, the bond market's moves are being driven by more immediate forces.
According to PIMCO Managing Director and Multi-Asset Credit Strategist Lotfi Karoui, investors looking to AI as the main culprit are focusing on the wrong factor.
"The recent rise in longer-dated U.S. Treasury yields isn't really about AI," Karoui wrote. "The back-up in yields since late February reflects shifting policy expectations far more than any meaningful repricing of the term premium tied to AI."
That conclusion comes even as the scale of AI-related investment continues to expand rapidly. A February 2026 report from Moody's Ratings found that major hyperscalers—including Amazon, Meta, Alphabet, Oracle and Microsoft—carry an estimated $662 billion in lease obligations tied to projects that have not yet begun, keeping them off balance sheets. Gartner separately estimated global AI spending will reach $2.5 trillion this year.
Karoui does not dismiss the potential impact of that spending, but he frames it as a longer-term issue rather than a current market driver. Assuming AI borrowing is behind the recent rise in yields "appears overstated," he wrote.
Instead, PIMCO points to cyclical forces, particularly those reshaping expectations around Federal Reserve policy. Since the start of the war in Iran, rising energy prices have filtered through the economy, affecting sectors ranging from construction and agriculture to transportation and retail. That pressure is contributing to renewed concerns about inflation.
As those concerns build, the market has begun to reassess the Fed's next moves. Policymakers have indicated that while still unlikely, additional rate hikes are not off the table as inflation risks persist amid geopolitical tensions and higher oil prices.
Karoui wrote that a decomposition of the 10-year Treasury yield since the start of military action in Iran shows that most of the increase has come from changing rate expectations rather than shifts in the term premium, which PIMCO defines as the expected excess return investors demand for holding longer-dated Treasurys instead of shorter-term securities.
That distinction matters because it suggests the bond market is reacting more to near-term policy uncertainty than to structural changes tied to AI financing.
Still, PIMCO cautions that the long-term effects of a debt-funded AI expansion have not yet fully materialized. The firm describes this as a potential "slow-moving structural pressure" that could influence yields over time. For now, however, that impact remains limited.
There are early signs of how that pressure could build. Hyperscalers funding AI infrastructure have already shown a preference for locking in longer-term borrowing, accounting for 13% of year-to-date 10-year Treasury supply but more than 30% of 30-year issuance.
For now, though, the message from PIMCO is clear: the recent move in Treasury yields is less about the AI boom and more about the familiar forces of inflation, energy prices and an uncertain Fed path.
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