Borrowing to Build
The 10-year U.S. Treasury yield jumped past 5% in September, yet inflation expectations have barely moved. Why? One explanation is the capital being raised to build AI infrastructure.
The 10-year U.S. Treasury yield crossed 5% in September, reaching levels not seen since 2007. Yet higher inflation expectations account for relatively little of this year’s increase. Beneath the headline yield sits another important consideration: the enormous sum of capital required for the artificial intelligence (AI) infrastructure buildout. Understanding that
demand for capital may matter more to investors than the next inflation report.
Source: FactSet. Data from 12/31/25 to 9/30/26. Real rates are the yield on U.S. constant maturity 10-year Treasury Inflation-Protected Securities (TIPS). Inflation expectations are the 10-year breakeven inflation rate, calculated as the difference between the U.S. constant maturity 10-year Treasury yield and the 10-year TIPS yield.
- Every few generations, a new technology demands that the economy rebuild its physical foundations. In the 19th century it was the railroads, whose construction absorbed as much as 4.3% of U.S. economic output at its peak.1 Today it is AI, and the data centers, chips and power infrastructure behind it could require more than $8 trillion of investment in the U.S. alone over the next five years, with annual investment potentially reaching 7% of GDP by 2030 and surpassing the railroads at their height.2 Corporate cash flow is unlikely to cover that bill, so a growing share may need to be financed externally, putting AI’s builders in competition with other businesses and the U.S. Treasury for the same pool of savings.
- A Treasury yield has two components, the inflation investors expect and a “real,” or inflation-adjusted, return. This year the 10-year yield increased from 4.2% to 5.3% through September 2026, and while inflation expectations have barely moved, real rates have climbed 100 basis points, as shown in the chart above. The rise in yields, in other words, reflects a higher real rate rather than greater inflation protection. As competition for capital has increased, driven by the AI buildout, heavy Treasury issuance, renewed Federal Reserve tightening, and higher non-U.S. interest rates, investors are requiring a higher return on their investments.
- While several factors may be contributing to higher real rates, we believe the AI buildout represents an important source of demand for capital. In our view, companies across the AI supply chain, from semiconductors to power generation, may be well positioned for long-term growth, as projected spending on this buildout translates into revenue for the businesses laying its track.
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1 Gallman and Rhode, Capital in the Nineteenth Century, National Bureau of Economic Research, February 2020.
2 AI investment based on Alger estimates as of September 2026. Historical GDP from the U.S. Bureau of Economic Analysis; projected GDP from the Congressional Budget Office, February 2026.
The views expressed are the views of Fred Alger Management, LLC (“FAM”) and its affiliates as of October 2026. These views are subject to change at any time and may not represent the views of all portfolio management teams. These views should not be interpreted as a guarantee of the future performance of the markets, any security or any funds managed by FAM. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.
Risk Disclosures: Investing in the stock market involves risks, including the potential loss of principal. Growth stocks may be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. Past performance is not indicative of future performance. Investors whose reference currency differs from that in which the underlying assets are invested may be subject to exchange rate movements that alter the value of their investments. Companies involved in, or exposed to, AI-related businesses may have limited product lines, markets, financial resources or personnel as they face intense competition and potentially rapid product obsolescence, and many depend significantly on retaining and growing their consumer base. These companies may be substantially exposed to the market and business risks of other industries or sectors, and may be adversely affected by negative developments impacting those companies, industries or sectors, as well as by loss or impairment of intellectual property rights or misappropriation of their technology. Companies that utilize AI could face reputational harm, competitive harm, and legal liability, and/or an adverse effect on business operations as content, analyses, or recommendations that AI applications produce may be deficient, inaccurate, biased, misleading or incomplete, may lead to errors, and may be used in negligent or criminal ways. AI companies, especially smaller companies, tend to be more volatile than companies that do not rely heavily on technology.
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