With bond yields on the rise, it’s a good time to explore the structural drivers of long-term interest rates. One key consideration is the role of hyperscaler investment in driving yields.
Our initial conclusion is that while inflation and fiscal risks are the predominant drivers of higher long-bond yields, hyperscaler demand for capital may be driving yields up at the margin.
(We define a hyperscaler as a company that runs large, global networks of data centres that provide cloud computing and data storage on a large scale. They also provide the computing power needed for artificial intelligence (AI) models.)
Typically, long bond yields are a function of a few features, namely:
- Expected short-term rates
- The inflation risk premium
- The term premium
- The fiscal risk premium.
Chart 1 below gives a sense of the magnitude of the sell-off in long-bond yields over the last few years.
Chart 1: 10-year yields in select developed markets
Let’s start with the inflation risk premium. The Iran War has enabled the inflation beast to rear its ugly head, with Brent crude prices soaring from close to $65/barrel in February to over $100/barrel at the time of writing, peaking at $120/barrel. This has led to increased fuel costs globally. The inflation shock is more than simply a headline inflation shock; there is increasing evidence that it is moving into a traded-goods inflation shock as well. The subtle distinction is that, while deliverable crude from the Strait of Hormuz is a primary cause of the inflation shock, there is also increasing downstream inflationary pressure. For example, the magnitude of the increase in crack spreads (refined product margins) exceeds that of Brent crude or West Texas Intermediate prices, which filters through to consumer and producer prices (chart 2).
Chart 2: Inflation transmission from oil to refined products to consumers/producers
One consequence of higher inflation is higher nominal GDP growth. Chart 3 shows the relationship between short-term rates in the US and our model, which tracks 10-year average nominal GDP growth. The two track each other closely. This highlights that one of the key drivers of bond yields is nominal GDP growth, and, by implication, the level of inflation.
Chart 3: US 10-year versus Investec nominal GDP model
Source: Investec Wealth & Investment International, Bloomberg, 25/09/2026
Due to inflationary pressures, some central banks have already begun to hike rates. As mentioned above, the long bond yield is also derived from expected short-term rates. Before the conflict with Iran began, most central banks were expected to continue pursuing monetary easing, but this is no longer the case. Most central banks are expected to continue to pursue monetary policy tightening. One of the expected consequences is more expensive government debt, which implies that monetary policy tightening will likely increase government interest spending – particularly when issuing short-term debt. For example, net federal interest outlays account for about 15% of total federal outlays in the US, eroding spending on other growth-enhancing areas of the US economy.
One consequence of higher oil prices is their impact on the fiscal outlook. The responses of countries are not uniform in respect of energy shocks, but the various risks to the fiscal outlook are higher deficits through:
- Subsidies
- Reductions in energy taxes (like the temporary reduction in the fuel price levy in South Africa)
- Increased public spending (spending on items indexed to inflation, for example, in South Africa, social grant adjustments or public sector wage settlements due to higher inflation expectations)
- Higher debt-service costs (discussed above).
One of the clearest examples of a deficit-funded intervention is Japan’s emergency fuel programme, designed to prevent a sudden rise in retail fuel prices. Japan also enacted a supplementary budget to respond to the crisis in the Middle East.
Extract from Japan’s supplementary budget
As the situation in the Middle East remains uncertain, while monitoring future price trends and the impact on the economy, the government will make appropriate Judgements and respond in a timely manner as needed so that economic activities and people's daily lives are not negatively affected, and make all possible perparations from the perspective of minimizing risk.
These provide the clearest indication of how conflict and inflationary pressures can increase fiscal risk. However, country-level response is not uniform. For example, Japan is almost entirely dependent on oil from the Middle East. The US is relatively energy independent of external suppliers.
Chart 4 expands the previous model on the US 10-year to include US interest spending as a percentage of GDP. As interest spending as a percentage of GDP has increased, the 10-year US yield has also risen.
Chart 4: Investec 10-year interest spending model
Source: Investec Wealth & Investment International, Bloomberg, 25/09/2026
The hyperscaler effect
Another proposition put forward is that AI capex is one of the potential drivers of higher rates, given the actual and expected quantum of capex and the competition between sovereigns and hyperscalers for capital.
Chart 5 shows the potential scale of hyperscaler investment needed over the next few years. Recently, the UK Financial Stability Review found that hyperscaler year-to-date investment-grade debt issuance was broadly comparable to UK gilt issuance over the same period. The scale of capital required will likely influence the extent to which hyperscaler demand for capital truly competes with sovereigns. This implies that long bond yields currently derive most of their value from inflation and fiscal risk. Still, competition for capital may become an increasingly important theme to monitor – particularly as hyperscalers seek to turn their investment into more tangible revenue generation.
Chart 5: Hyperscaler spending boom
Source: Blomberg, 25/09/2026
Even when considering the narrative of competition for capital, it is worth highlighting that hyperscalers have various avenues to access capital, including free cash flows, capital raises, and third-party funding.
In conclusion, elevated inflation risk and its implications for short-term interest rates remain one of the key drivers of long-bond yields. Another is rising short-term rates, which also impact debt-servicing costs for the government, while potential government intervention is another (impacting fiscal risk). Overall, it is our view that yields are primarily being driven by nominal GDP growth (a function of inflation) and government fiscal positions. AI seems to be a marginal driver of yields at the moment.
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