Markets: As bond yields cool off, stock buyers step in where angels fear to tread
In this news:
Key takeaways
- Stock futures rose following a dip in benchmark 10-year Treasury yields to 5.08%.
- Rising bond yields have more than doubled the cost of capital for artificial intelligence hyperscalers since 2023.
- Bank of America notes that hyperscalers now need a 10 percent return on investment to justify borrowing costs.
S&P 500 futures were up 0.47% this morning. The index fell 1.09% on Friday.
In Europe, the Stoxx 600 was down 0.78% in early trading, and the U.K.’s FTSE 100 was down 0.87% before lunch.
Asia: South Korea’s KOSPI was up 1.76%. Japan’s Nikkei 225 was down 0.62%. India’s Nifty 50 was down 1.19%. China’s CSI 300 was up 0.09%.
Brent crude rose to $108 per barrel.
Bitcoin was at $82,769.
The 10-year takes a chill pill
The yield on the benchmark 10-year Treasury was 5.08% this morning, down from its recent peak of 5.3%. So how bad was it last week when yields spiked? The market was pricing in risk similar to the Great Financial Crisis, according to this chart from Michael Hartnett’s team at Bank of America.
Hyperscalers cost of capital hurts AI profitability
Increasing yields in the bond market are making it more expensive for tech companies to borrow the money they need to fund AI development. “The [weighted average cost of capital] for hyperscalers is now 10%, up from 4% in 2023,” according to Bank of America’s Savita Subramanian.
Ten percent, therefore, is now the ROI threshold hyperscalers need to meet.
“Economics 101 tells us that investing makes sense until returns on incremental invested capital (ROIIC) fall below the weighted average cost of capital (WACC). Inflation, real yields, credit events, increased regulations, equity supply outpacing demand are risks from here,” she said in a note.
To give you an idea of how closely the AI-debt market situation is being watched, Subramanian said, “Most of our equity meetings are 90% AI, 10% everything else. But they all boil down to the question above.” Her forecast: The capex wave has further to run, but there might be a “marked shift in trend” next year if yields don’t decrease.
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