Debt-funded AI investment could eventually lift risk premia — the extra return investors demand to hold riskier or longer-dated assets — but that process is likely to play out over years, Pimco multi-asset credit strategist Lotfi Karoui wrote in a report.

For now, higher long-dated Treasury yields are better explained by shifting expectations for the Federal Reserve’s interest-rate path as the Iran war fans inflation risks, he said.

“Structural pressures from the AI buildout are real, but they are growing slowly, not driving the yield moves investors are watching right now,” Karoui wrote. “Cyclical factors still support the hedging role of bonds.”

Treasuries have sold off in recent weeks as investors increasingly bet the Fed may need to keep rates higher for longer after the Iran war spurred the biggest inflation surge since 2023. The move has also raised questions about whether other forces are pushing up long-term borrowing costs.

Among the factors cited by analysts include concerns about mounting US debt burdens and the financing demands of the AI boom. Tech companies have sold more than $300 billion of bonds to US investors, prompting debate over how much additional borrowing markets can absorb and whether the surge in issuance could spill over into sovereign debt markets.

Yields on benchmark 10-year Treasuries have risen about 50 basis points from this year’s low to 4.43% Tuesday. Those on 30-year Treasuries have climbed more than 30 basis points. Traders have pivoted from pricing rate cuts before the war to a more than 60% chance of a Fed rate hike by December.

Karoui said the “duration supply shock” from AI borrowing has yet to fully arrive. He pointed to measures including the Bloomberg US Corporate Investment Grade index, where duration remains well below post-Covid highs, suggesting the market hasn’t had to absorb the full amount of longer-dated bonds that a sustained capex cycle could eventually generate.

“By the same token, AI-related credit expansion, wider fiscal deficits, and persistent external imbalances do not mean that US Treasuries have lost their hedging role in multi-asset portfolios,” Karoui said. “Cyclical market behavior should be distinguished from longer-run concerns.”