Warsh: hyperscalers lift 10-year Treasury to 5%

The Federal Reserve raised its benchmark rate by a quarter point to 3.75-4% on Wednesday, but the rate that matters more for mortgages and corporate loans is the 10-year Treasury yield, which the Fed doesn't set. That yield has been rising for months and just hit the psychologically terrorizing 5%.

When a reporter asked Fed Chair Kevin Warsh what was behind the rise, he gave three reasons: hyperscaler borrowing, economic growth, and geopolitics. On the AI angle, he described the 10-year as 'the most important asset anywhere in the world' and 'the risk-free asset upon which every price of virtually every asset in the world is related to.' The argument is that there is only so much money to lend at any given time, so when Amazon, Microsoft, Alphabet, Meta, Oracle and Coreweave borrow to build data centers, they compete with the U.S. Treasury for that money. Warsh didn't list the federal deficit, the explanation most bond investors themselves give, and didn't address a question about it during the conference. That fits his stated view that Fed independence means 'we stay in our lane.'

The AI angle cuts two ways for the Fed. In his prepared remarks, Warsh cited strong productivity growth and robust capital investment as evidence the economy is strengthening and capital conditions are loose, reasons to hike rather than hold. But he has also been optimistic that AI will eventually expand the economy's capacity and be disinflationary, and said the two sides of the Fed's mandate aren't working against each other. The stakes hinge on whether the AI debt surge persists and how much it feeds into long-term yields that affect everyone's borrowing costs.