How to under stand the current puzzle in bonds and equities 

Financial Times Europe 2 Sep 2026 Matt King Matt King is a macro and credit strategist and founder of Satori Insight 

The two most strik ing moves in mar kets this year are the extent of the rise in bond yields and the strength and breadth of the equity rally. The biggest puzzle is why the first has not destabil ised the second. Bulls attrib ute both to the same thing: the remark able surge in cor por ate profits. Higher yields, on this read ing, are just a reflec tion of higher expect a tions for longrun growth on the back of the AI invest ment boom. If earn ings can remain above his tor ical norms, equit ies are there fore inex pens ive. The more optim istic go fur ther still, expect ing the growth to reduce future gov ern ment defi cits. This nar rat ive has genu ine merit, inso far as the bond move has come in real yields, and not infla tion expect a tions priced into mar kets. But it fails three tests. It does not account for the strain already vis ible in the pock ets of credit that are fund ing the AI boom. It does not explain why there has been a revival at the same time in “debase ment” trades, which bet on assets expec ted to bene fit from a weak en ing dol lar. And by over look ing how the spend ing has been paid for, it grants per man ence to an arrange ment that is any thing but. Real yields, and their slower-mov ing cousin the nat ural rate of interest, do loosely fol low growth. But it would be more accur ate to say they are driven by the private sec tor’s desire to bor row — and on that front the changes over the past three years have been enorm ous. 

There are three ways to pay for a data centre. You can spend your own cash. You can lend your cred ib il ity so that someone else can bor row. Or you can bor row your self. This boom has done all three, in that order — and the order and the mag nitude go a long way to explain ing the price action in mar kets. Being able to fin ance an invest ment boom through your own bal ance sheet —say, $200bn of spare cash that the four biggest spend ers of Microsoft, Alpha bet, Amazon and Meta had accu mu lated by 2020 plus the $650bn a year they now gen er ate from oper a tions — has two enorm ous advant ages. First, your capex decisions can be made rel at ively inde pend ently of the mar ket cost of cap ital. But in addi tion, the eco nomy is able to enjoy all the bene fits of that spend ing without any of the upward pres sure on interest rates that would nor mally have res ul ted from the same spend ing fin anced through credit. With the boom trans lat ing dir ectly into rev enue growth for sup pli ers, and indir ectly into wealth gains for the rest of the eco nomy, investors’ nat ural tend ency is to extra pol ate. 

I estim ate hyper scaler free cash flow may now have fallen to zero, but with both profi t ab il ity and bal ance sheets still strong, the shift from cash- to creditbased fin an cing to equity investors seems like a foot note. Even now, des pite indi vidual bumper bond deals, the scale of tech issu ance remains dwarfed by that of gov ern ment bor row ing — lead ing some to con clude that it is unim port ant for interest rates. But what mat ters is not just the scale, but the price sens it iv ity. Nor mally cor por ate issu ance falls away as yields rise, but tech issu ance has been doing the oppos ite. Bor row ing on this scale, which is indif fer ent to the cost it pays, drives up yields for every one else — homeown ers and even gov ern ments — and is likely to con tinue doing so for as long as the equity mar ket keeps val id at ing it. What will even tu ally stop it is a turn in the cur rent optim ism about AI returns: either through con cerns about over ca pa city and mar gins, or because of the broader fal lout from the rise in yields. 

Until then, the debate is likely to con tinue. But infer ring that rising yields reflect a stronger eco nomy that will in due course pay for the defi cit is to get the caus a tion back wards. Defi cits are aggrav ated by higher interest rates — even when the rate rises stem as much from the private sec tor’s price-insens it ive bor row ing as from the gov ern ments’ profl igacy. This can not be fixed by buy ing back the long end and fund ing even shorter. A rise in real yields of this size has, in the past few cycles, con sist ently pulled money back out of risk and ended the cycle. This time it has not — at least yet. That is a sign not of a per man ently higher plat eau in profits, but of the extraordin ary way that, until recently, the boom was being paid for. Every bubble is explained twice. In the build-up, the emphasis is on what investors have been buy ing. Only after wards do people come to recog nise that the more import ant point is how it was all being fin anced.