Bond selloff is likely amplified by obscure economic rate

The New York Fed recently released updated estimates of its widely followed [Laubach-Williams model](https://www.newyorkfed.org/research/policy/rstar) through the second quarter of 2026, showing R-star at 1.65%, slightly down from 1.73% in the first quarter. But it has trended higher since the first quarter of 2025 when it was 1.36%. The current R-star, or neutral rate, with the ongoing ramp-up in bond sales by hyperscalers — the largest cloud computing companies such as Amazon.com, Microsoft and Alphabet's Google — and mounting U.S. borrowing is likely higher than that, market participants said, although they could not provide an estimate. Truist's Chip Hughey said that any R-star estimate involves "equal parts art and science." A recent rise in Treasury yields in part reflects growing investor bets that an obscure, theoretical rate consistent with stable growth and inflation is moving higher. Some believe the so-called R-star, which is a rate that neither stimulates nor restrains economic activity, might be higher than the latest data indicates. Analysts estimate it has risen as the U.S. economy absorbs a strong mix of capital spending tied to artificial intelligence and heavy government borrowing. The R-star moving higher suggests that interest rates may settle at structurally elevated levels, adding to pressure on bond prices. Still, analysts could not give an exact estimate of the level as the measure can be calculated using different methods and relies on trailing data. A structural increase in R-star is putting upward pressure on two- and five-year yields because it implies the Fed will ultimately need to settle at a higher policy rate. The 10-year yield is also rising both because investors expect policy rates to increase and because they demand a larger term premium, the extra compensation required to hold longer-term debt. Bond yields were again under pressure this week. For the 30-year yield, Zachary Griffiths of CreditSights believes rising R-star has a "historically asymmetric impact," meaning the rate is biting hardest on this part of the curve because of elevated debt levels and large, persistent deficits. Those fiscal concerns are being compounded by a growing supply of long-term debt beyond Treasuries, particularly from AI-driven borrowing by hyperscalers, as massive bond sales compete with longer-dated U.S. Treasuries for investor capital. That has lifted long-term yields and likely elevated the neutral rate, analysts said. Ulrike Hoffmann-Burchardi, chief investment officer Americas and global head of equities at the UBS Chief Investment Office, however, said that the Fed "cannot easily cut interest rates back to zero when the structural demand for capital remains this high." Still, some analysts think the tech-driven increase in R-star could be temporary if AI in the long term proves disinflationary. But as the AI boom is unfolding, the U.S. government continues to borrow heavily, with the national debt hitting $40 trillion. Analysts said it is far too early to say whether those forces represent a long-lasting change in the economy or a temporary phenomenon.

Bond selloff is likely amplified by obscure economic rate

New York Fed model shows 1.65% through Q2 2026

Bond selloff tied to higher R-star expectations

Higher neutral rate adds pressure across the yield curve

AI spending and government borrowing boost capital demand

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