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“Governments are borrowing heavily while investors are demanding greater compensation for inflation, fiscal uncertainty, and duration risk. This has pushed up term premium and long-term yields,” she further said. The 10-year US bond yields are the highest since 2002, and Japan 10-year bond yields are the highest since 1996.
“For emerging markets, this poses a huge challenge. Global bond markets set the opportunity cost of capital, and added to this aspect are global imbalances,” Thakur said.
When trade is organised around security and geostrategic concerns over comparative advantage, goods and capital move less frequently, surpluses and deficits become sources of friction, and the price of capital further rises for everyone around the world.
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Thakur further highlighted that another dimension to the changing global capital landscape, which is beginning to change the demand for and potentially the price of capital is the Artificial Intelligence investment cycle.
“This is not limited to software or computing, it requires data centres, semiconductors, reliable electricity and transmission capacity, investments into which are creating significant demand for capital and are increasingly being financed through debt,” she said. More investments would require greater demand for savings, while higher borrowings would mean that financial markets have to absorb a large supply of debt.
Global bond yields, therefore, cannot be understood only in terms of monetary policy or fiscal deficits anymore, she said, highlighting that the scale of AI buildout is now part of that story.
