Nasdaq Hits Record High Despite Surge in US Treasury Yields to 5.2%... Capital Flows Concentrating on AI

As volatility in the capital markets increases with the US 10-year Treasury yield rising to 5.2%, experts have released analyses regarding the unusual trend of the Nasdaq index breaking record highs. The diagnosis is that the recent rise in Treasury yields is driven by a complex combination of inflation instability, national debt issues, and the capital demand from hyperscalers (giant technology companies).

Treasury Yield Rise Driven by Inflation, Debt, and Hyperscaler Capital Demand

Experts have presented three key factors regarding the background of the recent vertical surge of the US 10-year Treasury yield to 5.2%. First, while visible consumer prices appear to be decreasing, there is an underlying instability where prices may rise again from their low points. Additionally, as the US debt problem intensifies—requiring new debt to pay off existing interest—an analysis suggests a situation is occurring where "the tail wags the dog."

In particular, the structural change in the capital market is noteworthy. While liquidity was abundant following the pandemic, since this year, hyperscalers (giant technology companies) have been requiring massive amounts of capital, such as issuing large-scale corporate bonds and taking out loans. It is explained that this has increased upward pressure on interest rates as a structure is formed where the money in the capital market is divided between hyperscalers and Treasury bonds. Furthermore, the "handover of Treasury bonds," where the primary buyers of Treasuries shift from the Fed to non-Fed (private) entities and the private sector demands higher interest rates, was also identified as a factor increasing interest rate volatility.

High-Interest Rate Era: Expansion of Big Tech Market Share and Market Polarization

While rising Treasury yields typically contract asset markets, the phenomenon of the Nasdaq recording record highs was attributed to the "overwhelming dominance of Big Tech." The analysis suggests that as high interest rates persist, small and medium-sized companies struggling with capital procurement will take a hit, whereas the market share of Big Tech, which possesses strong cash-generating capabilities, may actually increase.

Currently, the market is in a phase where large-scale spending by Big Tech, such as investments in AI data centers, is driving growth. Although concerns regarding valuation burdens exist, investors are focusing on the future growth potential of Big Tech amidst market conditions where it is difficult to find other alternatives. Consequently, the polarization between Big Tech and small-to-medium tech companies is projected to deepen during high-interest rate periods.

The "Compressed Movement" of Capital Toward AI

Market experts defined the current economic situation as a "time of compression." While it is an environment where overall consumption or investment could contract due to rising interest rates and interest burdens, capital tends to flock to the most certain places. The prevailing view is that the most certain growth engine in the current market is only AI (Artificial Intelligence).

Just as consumers concentrate their spending on specific items through selection and focus, the analysis suggests that the capital market is also moving toward the clear candidate that is AI. With the market capitalization of AI-related companies already having become massive, it is explained that the process of capital continuously moving into the AI sector is supporting the current rise in the index.