Rising Bond Yields Emerge as New Threat to the AI Trade

Morgan Stanley told clients that a shift in markets last seen after World War II is underway, and that bond yields could have further to rise from here. The bank is recommending investors favor quality, large-cap stocks, companies adopting artificial intelligence, and the S&P 500 as ways to navigate that environment. But higher yields cut both ways for the AI trade. Wolfe Research warned separately that rising yields may put pressure on AI spending, since higher borrowing costs raise the bar for the enormous capital outlays tech companies are making on data centers and chips. A separate note on the long end of the US yield curve — the market for longer-dated Treasury bonds — flagged increasing scrutiny of that segment, consistent with Morgan Stanley's view that yields have room to climb. The tension is unresolved: Morgan Stanley sees AI adopters as a place to hide from higher yields, while Wolfe sees the AI spending boom itself as vulnerable to those same higher yields. Neither note specified a yield level that would trigger a change in view.