Key Takeaways

  • Treasury yields climbing above 5% are driven by rising real rates rather than surging inflation breakevens, reflecting actual economic expansion.
  • Massive AI infrastructure capex has replaced residential housing as the primary engine driving the modern business cycle.
  • Fixed income assets must offer 2% to 3% real returns just to compete with expected equity gains from high-growth tech investments.
  • Central bank forward guidance around 2% inflation targets no longer anchors bond markets on words alone; investors now demand verifiable performance.

The Growth Engine Behind Higher Rates

When bond yields spike, conventional market wisdom assumes investors are panicking about unchecked inflation. Luke Kawa argues that the post-2023 bond selloff tells the exact opposite story. Inflation expectations have stayed relatively calm while real yields have surged.

Buyers are not dumping bonds because they fear currency debasement. They are demanding higher returns because the real economy is running hot. As Kawa puts it, “If we had to do a principal component analysis or something, I think what would stick out across the board is it's the global growth impulse. It's activity. It's both in the US and globally.”

Central banks are holding rates higher because underlying demand refuses to cool. When industrial activity and corporate spending expand worldwide, fixed income must offer better terms to keep up. Kawa notes: “That is far and away, I would say, the one thing to think of if you had to if you just had an elevator pitch with someone, why are bond yields high? Because growth is really strong, that's putting inflation up, and central banks are expected to respond to that.”

Competing for Capital with AI Capex

For decades, the housing market served as the main transmission channel for interest rates and the dominant driver of business cycles. That dynamic has shifted. Massive capital expenditure on artificial intelligence infrastructure, data centers, and advanced silicon now sets the pace for business spending.

This capital wave creates direct competition for investor dollars. If public equities and venture projects promise large returns from technological deployment, safe sovereign bonds look unappealing at low yields. Fixed income has to reprice higher in real terms to attract any balance sheet capacity.

Kawa explains the tension directly: “In order to get bonds to be a more competitive asset with stocks, you do need to see reals rising, and that a lot of the move is effectively saying like, 'Hey, I can't justify buying a 2% even real return, 3% real return, when this is what I think is on offer in AI.'”

The Death of Verbal Forward Guidance

For years, central bankers relied on jawboning. They believed that repeating a 2% target would magically anchor market expectations. Kawa argues that era is over. The bond market now demands proof rather than policy speeches.

“I grew up hearing about how central banks just by virtue of saying inflation was going to be 2%, that was one of the important factors that would help it be 2% over time,” Kawa says. “I think now we're learning that that's junk, completely junk. You got to prove it over time or else we'll be in a situation we are right now where people really apparently don't like to hold bonds.”

Capital allocators have adjusted to this reality. They demand structural yield rather than trusting central bank promises.

What to Do With This

Audit your company's internal hurdle rate this week. If you are still evaluating new projects, server contracts, or product lines against zero-interest-rate assumptions, reset your baseline discount rate to at least 8% to reflect a 5% risk-free floor. Move your idle operating cash into short-duration Treasury bills yielding over 5% immediately rather than leaving it in standard commercial bank deposits.