AI debt binge pushes up government borrowing costs, analysis says

The companies at the centre of the spending spree are the "hyperscalers", tech giants such as Google and Microsoft behind the massive investment in data centres and other AI infrastructure. After initially funding the build-out from their own profits, they have turned to corporate bond markets, the analysis says. The Bank for International Settlements said bond issuance from the five largest hyperscalers reached US$222 billion ($315 billion) this year alone, with borrowing increasing faster than past booms. "Even benchmarked against past credit booms, the issuance of AI-related debt is rapid," it said.

Commonwealth Bank's head of market strategy and rates research, Adam Donaldson, says there is "enormous competition" for money in the government bond market, pointing to Alphabet's first Australian dollar bond in August, which included 10- and 20-year bonds, timeframes often used by governments to borrow. "That 10- and 20-year, that's very much the space that sovereigns and the states occupy when they're borrowing, so it's a direct source for competition for funds," he says. European Central Bank policymaker Martins Kazaks told Reuters: "There is a global fight for money. Investment in AI is one of the key factors driving up the cost of money."

Donaldson estimates the AI story probably adds about 50 basis points to the yield on a 10-year Australian government bond, which would imply roughly an extra $3 billion in annual interest costs for the federal budget this year. The analysis notes AI is not the only cause of the global fight for money: governments are also borrowing heavily to finance deficits, the green energy transition and higher defence spending.

The implications for mortgage rates are not straightforward. Higher bond yields push up fixed-rate mortgages, but the analysis says the jury is still out on what the AI craze means for variable rates set by central banks such as the Reserve Bank, which is expected to raise rates this week. Some economists argue neutral rates have risen significantly, with the competition for money that the AI bonanza has helped fuel one reason. If they are right, actual interest rates could be higher than before to maintain the same monetary stance. Others say AI could ultimately increase productivity, which would tend to support lower interest rates.

Commentary from the big four banks as they deliver results over the next fortnight may shed light on whether the global contest for money will also drive up funding costs for Australian banks, which rely on overseas markets for a significant chunk of their funding.