Palihapitiya Warns 5.5%-6% Treasury Yields Could Hit AI Businesses
Chamath Palihapitiya said a 10-year Treasury yield of 5.5% to 6% could hurt businesses reliant on financing spreads, including AI companies. He cited deficits and broader Western economy factors, and said large technology companies might need to step in during a sector correction.
Chamath Palihapitiya warns that a 10-year bond yield of 5.5% to 6% would “run over” any business reliant on financing spreads, no matter what it does, including AI businesses. The venture capitalist made the remarks on an episode of the All-In Podcast that aired on Friday. He said the risk has nothing to do with AI. He tied it to debt-to-GDP levels and other factors across broad-based Western economies.
Deficits Seen as the Pressure Valve Palihapitiya said that as long as the 10-year yield is kept from reaching those levels, "we’re going to be fine." The Sri Lanka-born Canadian-American entrepreneur said policymakers must focus on deficits and find a "fair trade" where the bond market backs off to "keep the party going" after the midterms. Huge spending proposals, he warned, would push the 10-year higher and set off a "negative cascade" to everything. A calmer approach focused on cutting waste, he said, would draw a favorable response.
Why Financing Spreads Matter A financing spread is the premium a borrower pays over a benchmark rate, often the risk-free rate, which is the return on a safe government bond. When the 10-year yield rises, the benchmark cost of capital can rise for businesses whose financing is priced off longer-term rates. He also called the exposure an Achilles’ heel, a single weak point in an otherwise strong system. He said "all this other stuff is complete goodness," but financing these businesses as a spread over the risk-free rate is "the big problem." The 10-year Treasury yield recently touched 5.34%, its highest level since 2002.
In early October, JPMorgan Chase & Co. (NYSE: JPM ) CEO Jamie Dimon said that AI spending is competing with government borrowing for capital. Goldman Sachs Group Inc. (NYSE: GS ) CEO David Solomon raised a related concern earlier this week, saying AI infrastructure financing could pressure borrowing costs and threaten some projects.
The 10-year Treasury yield has risen about 75 basis points since early July. Big Tech Seen as the Backstop Because of that risk, Palihapitiya said, large technology companies would need to step in during a worst-case scenario. He named Microsoft Corp. (NASDAQ: MSFT ), Alphabet Inc.
(NASDAQ: GOOG ) (NASDAQ: GOOGL ), Meta Platforms Inc. (NASDAQ: META ) and Nvidia Corp. (NASDAQ: NVDA ). Chamath said large technology companies such as Microsoft, Alphabet, Meta and Nvidia would need to step in if the sector faced a one- or two-year correction.
Read Also: Capital Over Chips: Broadcom CEO Warns Financing Costs Could Slow AI Expansion Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published editors. Photo courtesy: Shutterstock