The era of ultra-low interest rates that defined the post-2008 global economy may finally be over as the world enters "a new macro regime" characterised by structurally higher borrowing costs, sustained investment in artificial intelligence (AI) and infrastructure, and elevated geopolitical risks, according to a recent report from Moody's Ratings.
Bond Markets Signal Higher Borrowing Costs
The Moody's report states that government bond markets indicate higher interest rates are likely to persist. "Long-term government bond yields have risen structurally across advanced economies, marking a durable repricing of duration risk," the report said. It noted that 10-year sovereign bond yields across advanced economies have climbed back to levels seen before the global financial crisis, reflecting expectations of stronger investment demand, larger fiscal deficits, and structurally higher inflation.
Capital Flows to AI, Defence, and Critical Minerals
The report said capital is expected to continue flowing toward sectors backed by long-term policy priorities, including AI, semiconductors, defence, electrification, and critical minerals. In contrast, sectors facing AI-driven disruption or structural cost pressures are likely to lag.
| Supported Sectors | Lagging Sectors |
|---|---|
| AI and adjacent technologies | Those facing AI-driven disruption |
| Defence | Those with structural cost pressures |
| Critical minerals | |
| Energy-transition plays | |
| Electrification | |
| Semiconductors |
"The sectors attracting disproportionate capital and policy support - AI and adjacent technologies, defence, critical minerals and energy-transition plays - share these characteristics. Those lagging adoption or facing structural cost pressure are repricing in the opposite direction," Moody's said. Industrial metals are increasingly supported by structural investment in digital infrastructure and the energy transition, while geopolitical tensions continue to keep a premium embedded in energy prices.
Risks to the Outlook
Moody's cautioned that current market valuations hinge on expectations that AI investment will generate productivity gains, funding conditions remain supportive, and geopolitical tensions do not worsen significantly. "Current pricing hinges on whether expectations for policy-supported, capital-intensive growth translate into real earnings and productivity gains. Any slippage in outcomes, tightening in funding, stress in opaque credit channels or an escalation in geopolitical fragmentation could expose vulnerabilities and trigger a broad reassessment of valuations and credit risk," the report said.
"A new macro regime is driving differentiated repricing across financial assets," market pricing indicates that the post-2008 era of ultra-low interest rates and subdued inflation has given way to a fundamentally different macroeconomic environment.
For executives and investors, the Moody's analysis underscores a structural shift: cheap borrowing is no longer the baseline, and strategic capital allocation must prioritise policy-aligned sectors like AI and defence while managing the risks of higher real rates and geopolitical uncertainty.
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