Moody’s Atsi Sheth warns global bond yields’ rise is structural, inflation may keep rates higher for longer

The rise in global bond yields reflects a structural shift in the world economy, and a further broadening of inflation could keep interest rates higher for longer, putting borrowers under renewed pressure, Atsi Sheth, chief credit officer at Moody’s Ratings, told CNBC-TV18.

“We think it’s structural,” Sheth said in an interview, referring to the rise in sovereign bond yields. She attributed the shift to rising government debt, limited fiscal flexibility in ageing economies, geopolitical and technological uncertainty, and inflation that is proving harder to bring down to pre-pandemic levels.

“We have not been in that for six years now,” she said, referring to the end of the prolonged period of very low inflation. For credit markets, the consequences are significant: “Much higher rates” are “incredibly consequential,” she said.

The shift marks a departure from the 10 to 15 years after the global financial crisis, when low inflation and low interest rates created a more benign environment for borrowers. Governments are now carrying higher debt burdens, while companies are financing large investment programmes at a time when borrowing costs have risen.

Sheth said there was an “uncertainty term premium” in bond markets, reflecting the additional return investors demand amid uncertainty over the economic outlook. In advanced economies, she noted, a substantial share of public spending is committed to age-related expenditure, leaving governments with limited room to reduce debt.

Technology adds another layer of uncertainty. As artificial intelligence reshapes labour markets, governments may have to shoulder some of the resulting economic and social costs. At the same time, Sheth said, markets were recognising that costs were unlikely to fall quickly to the levels seen under the previous macroeconomic regime.

Inflation could keep interest rates higher for longer

The immediate risk, however, is that the energy shock triggered by the conflict in the Middle East feeds into broader inflation and changes the trajectory of interest rates.

So far, the impact has been largely concentrated in the energy sector, Sheth said. If price pressures spread more widely, expectations of interest-rate cuts could be pushed back, prolonging the period of elevated borrowing costs.

“If that knock-on effect came to pass, that it’s not just food and energy that’s rising, it’s everything else, then the rates outlook, which currently people think, yes, you’ll have a couple of rate hikes over the next couple of quarters, but by the end of next year rates should start coming down. That won’t happen,” she said.

A sustained period of high inflation and high interest rates could test borrowers’ ability to service debt, particularly those with high leverage or limited pricing power.

A prolonged period of high inflation, high rates, that can test credit quite severelySHETH SAID.

The global economy has so far proved resilient through successive shocks, including post-pandemic inflation, tariffs and the latest energy disruption. Strong oil reserves, investment in artificial intelligence, resilient employment and consumption have helped cushion the impact.

But that resilience is not guaranteed to continue indefinitely. The duration of elevated oil prices matters as much as their level, Sheth said, while food prices could also come under pressure in an El Niño year.

“Nobody knows how long the conflict will last,” is the underlying uncertainty facing policymakers and markets, she said, adding that efforts to contain the shock would depend on a combination of policy measures and energy efficiency.

AI investment boom brings new credit risks

The surge in borrowing to finance artificial intelligence infrastructure is another risk to watch, particularly if the returns expected from the investment fail to materialise.

Sheth said the initial position of the large technology companies financing the boom provided some protection. Hyperscalers entered the cycle with substantial cash reserves and diversified revenue streams beyond AI, giving them a buffer against a slowdown in returns.

“For now that debt sort of sustainability may be quite comfortable,” she said.

The challenge lies in the coming years, when investors expect AI to generate substantial incremental revenue while allowing companies to sustain margins. If those expectations are not met, the credit implications could become more pronounced.

“Our expectation is that yes, there will be steady revenue growth, there will be sort of steady margin maintenance, but again there’s a risk that that won’t happen,” Sheth said.

The consequences would extend beyond the companies directly investing in AI. The US economy has become increasingly reliant on AI investment for growth, she said, while countries supplying critical minerals and other components to the AI supply chain could also be exposed to a reversal in the investment cycle.

Sheth also highlighted financing arrangements that can obscure the full extent of companies’ commitments. These include leases, purchase agreements and guarantees extended to other entities involved in building AI infrastructure.

“From our perspective, we certainly consider them liabilities and we do take them into account when we think of sort of the credit profile of any entity that has either extended guarantees or has made these leases sort of commitments,” she said.

Such arrangements can allow large technology companies to extend their creditworthiness to other entities without taking on conventional debt directly. Moody’s considers these commitments when assessing credit profiles, Sheth said.

The employment consequences of AI remain uncertain, too. While some forecasts anticipate substantial job losses, others expect productivity gains to generate new employment.

Historically, major increases in productivity have tended to be followed by economic growth that creates jobs, she said. At present, she added, there had been no net job losses solely attributable to AI, despite the headlines.

The more immediate concern may be the uneven distribution of the impact.

It’s the professions. Some professions will have job losses and that’s something to worry about. Other professions might have job growthSHE SAID

India’s growth is broad-based, but fiscal constraints remain

For India, the outlook is supported by strong domestic demand and a broad-based expansion in economic activity. Moody’s has raised its FY27 growth forecast to 7%, and Sheth said consumption, investment, manufacturing and services had all performed better than anticipated.

“Growth is not only high, it’s quite broad based,” she said.

The resilience of the economy, however, does not necessarily translate into stronger equity-market performance. India is an oil importer, and higher energy prices can weigh on its currency and affect the returns foreign investors receive. Sheth also pointed to the market’s differentiation between companies benefiting from the AI supply chain and those that are not.

India does not need to develop its own frontier AI models to benefit from the technology, she said. The bigger opportunity lies in using AI to improve productivity across the economy.

AI is an enabler, you don’t have to produce it in house to use its capabilities to increase productivitySHETH SAID

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For India, the question is where AI can be embedded in existing businesses and economic activity to lift productivity. Domestic demand has provided a source of strength, supported by income catch-up, entrepreneurship, jobs and consumption. But that alone may not be sufficient to sustain growth over the longer term.

“Just domestic demand without a productivity increase, without some sort of technology impetus is probably not sustainable,” she said.

India’s exposure to global trade also means its growth trajectory will depend partly on how it positions itself as supply chains are reshaped by geopolitics and tariffs.

Currency flexibility presents another trade-off. Sheth said a more flexible currency can help countries absorb current-account pressures without placing undue stress on the economy, debt balances or external liquidity. But depreciation also raises import costs for an energy-importing economy such as India and can add to inflationary pressures.

What could trigger an upgrade in India’s sovereign rating?

India’s growth potential is already a key strength in its sovereign credit profile. The constraint, Sheth said, is the country’s wider fiscal deficit and higher debt-to-GDP ratio compared with peers in the same rating category.

Sheth clarified that she was not Moody’s sovereign analyst for India, but said positive rating momentum would require a sustained improvement in fiscal trends.

“Lower deficits, lower debt, more fiscal flexibility” would strengthen India’s capacity to absorb external shocks, she said.

A deterioration in the growth outlook would pose a risk because growth is one of the principal supports for the current rating. However, neither weaker growth nor adverse fiscal trends was Moody’s base case at present, she said.