AI mania: Data centre investments linked to rising bond yields, inflation, mortgage costs
Huge investments in AI data centres are adding to inflationary pressures and competition for debt investors, potentially keeping bond yields, interest rates and mortgage costs higher for longer.
A tech spending boom on data centres linked to advances in artificial intelligence may be spilling over into higher interest rates and mortgage costs.
According to Stephen Miller, a strategist at GFSM Funds management the trillions of dollars being invested in AI may be stoking inflation and pushing up borrowing costs across other classes, including government government bonds.
“Some people think AI is a bubble, some think it is a boom just getting started,” Mr Miller said.
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By continuing you agree to our Terms and Privacy Policy.“Whatever the truth, we know there’s a huge amount of capex associated with all parts of AI and it’s being funded by the issuance of debt.
“(Google-parent) Alphabet recently issued in Australia and it competes with the Federal Government issuing bonds.
“So, if the private sector is offering alternatives, at the margin, it means government debt has to offer an incrementally more attractive yield to keep investors in their issuance.”
The rise in government bond yields linked to expectations for higher inflation in the US and Australia, prompted the central banks of both countries to lift interest rates in September.
On Tuesday, the Reserve Bank lifted interest rates to a 15-year high of 4.6 per cent. This move prompted two of Australia’s major lenders in NAB and Commonwealth Bank to announce increases to home loan variable interest rates by 0.25 per cent, effective October 9.
Each 25 basis point rise in the cash rate adds about $100 a month to repayments on a typical $700,000 home loan.
Macquarie looks at AI spending
The Macro Strategy team at investment bank Macquarie has also argued that record spending on AI infrastructure is contributing to higher interest rates.
In a note this week, Macquarie said spending on AI had reached such a high level that the economic activity it was generating was pushing up inflation.
The bank’s research team said governments should respond by cutting spending to create spare capacity for the tech boom.
“However, if they do not act (to cut spending), interest rates will peak at higher levels, increasing the pain felt in other sectors of the economy,” Macquarie said.
Rate outlook
Market futures are now divided as to whether the RBA will lift rates again in November, putting the probability of a move at about 50 per cent. In total, markets are pricing another 15 basis points of increases by the end of 2026, with the future cash rate priced to peak at 4.96 per cent.
Mr Miller says the AI rush is a new factor pushing up interest bills for home loan borrowers, business borrowers, and governments.
“But I tend to think sticky inflation and high government budget deficits are ahead of it in in terms of explaining rising US bond yields,” he said.
“We also have a bit of a toxic macro cocktail right now as we have stickly inflation, record peace time fiscal deficits in the US, and the competing issuance from hyper-scalers.”
The strategist suggested investors should adjust to high bond yields above 5 per cent as a ‘new normal’, which runs counter to the period of low rates between the GFC of 2008/09 and pandemic period between 2020 to 2022.
According to Mr Miller, the new normal of higher interest rates, record AI spending, and toxic macro cocktail of high government spending means bond yields may still have room to run higher.
“We used to think about bonds as a good diversifier to equities in a multi-asset portfolio, but that relationship’s broken down to an extent,” he says.
“Now for inflation protection. you can think about other diversifiers like a basket of commodities, or infrastructure investments.”
Analysts at Morgan Stanley expect spending on Australian data centres to grow at an 18 per cent compound average growth rate through to 2030.
“Agentic AI, coupled with further major advances in AI capabilities, are pointing to continued demand adoption - along with the associated substantial demand for the necessary data centre compute power to enable this,” they said.
The main limit on the rise of AI may be a shortage of cheap power, given capital and demand are expected to be in plentiful supply, the analysts said.
