Treasury curve steepening forces capex repricing as Warsh Fed signals higher-for-longer rates

The 10-year/2-year Treasury spread widened to +0.50 percentage points by mid-May as markets repriced the cost of capital upward following Kevin Warsh’s confirmation as Federal Reserve chair, with the 30-year yield reaching 5.19%—its highest level since July 2007.

Warsh took the oath of office on May 23, 2026, following a 54-45 Senate vote that positioned him as the architect of a higher-for-longer regime. The yield curve’s positive slope—after extended inversion—signals bond markets now expect sustained restrictive policy even as some anticipated Warsh might pursue aggressive cuts. With the 10-year at 4.56% and 2-year at 4.13% as of May 22, the curve’s steepening reflects Inflation expectations outpacing near-term rate cut optimism.

This repricing arrives as three capital-intensive buildouts converge: artificial intelligence infrastructure requiring $450-540B from hyperscalers in 2026 alone, energy transition spending projected at $3.8T by 2030, and Critical Minerals supply chain competition backed by $10B in government financing. Each faces direct exposure to financing cost inflation.

AI infrastructure economics under pressure

The Big Five hyperscalers—Amazon, Alphabet, Microsoft, Meta, and Oracle—projected $660-720B in total Capex for 2026, with roughly 75% directed toward AI Infrastructure. These companies raised $108B in debt during 2025 to fund expansion, with forecasts suggesting $1.5T in cumulative issuance through 2029.

Rising yields directly erode project economics. Microsoft attributed approximately $25B of its 2026 capex to component price inflation, with DRAM costs forecast at $9.71 per gigabyte versus $3.76 in 2025. When combined with higher debt service costs on multi-billion dollar data center builds, return-on-investment thresholds tighten considerably.

Amazon CEO Andy Jassy defended the spending, noting that capacity is being monetized immediately, with AWS reaching a $142B annualised revenue run rate growing at 24% year-over-year. Yet the pace assumes continued access to capital markets at reasonable spreads—an assumption now being tested as breakeven inflation expectations hit 2.70% at the five-year tenor.

Energy transition faces funding gap

US energy utility capex is projected at $222-228B annually for 2026-2027, part of a broader energy sector spending trajectory reaching $3.3T in 2025 and climbing toward $3.8T by decade’s end. Grid modernization, renewable integration, and data center power demand drive this wave—each requiring long-duration financing sensitive to rate movements.

The 30-year yield’s climb above 5% matters acutely for infrastructure with 20-30 year payback horizons. Renewable energy projects financed at 3.5% versus 5.2% face materially different internal rates of return, potentially rendering marginal projects uneconomic without policy subsidies or offtake guarantees. The repricing pressure intensifies for projects lacking explicit government backing or utility rate base inclusion.

Geopolitical shocks compound the challenge. Preston Caldwell, chief US economist at Morningstar, noted that higher input costs from oil are being readily passed through to consumers, adding to Fed inflation concerns. Energy transition economics assumed benign commodity markets; instead, copper reached record highs near $12,000 per tonne while geopolitical risk premiums embedded themselves in critical mineral valuations.

Geopolitical capital allocation emerges

The US State Department’s February 2026 critical minerals ministerial produced 11 new bilateral frameworks and $10B in EXIM Bank financing for Western-aligned supply chains. This government-backed capital stands apart from purely commercial financing now facing higher hurdle rates.

Markets are bifurcating into projects with explicit national security rationale—accessing preferential terms through government financing vehicles—and those competing on pure economics in a higher-rate environment. Western-China supply chain bifurcation introduces a risk premium that governments appear willing to subsidise through below-market financing.

The result is selective capital availability rather than broad retreat. AI infrastructure with clear monetization paths, energy projects with utility contracts or IRA subsidies, and critical minerals with government offtake agreements may weather higher rates. Marginal projects without such anchors face funding pressure.

What to watch

The Warsh Fed’s June meeting will clarify whether current yields reflect appropriate terminal rate expectations or overshoot. Any signal of accelerated cuts would narrow the 10Y-2Y spread and ease capex pressures; sustained hawkish rhetoric cements higher-for-longer pricing. Hyperscaler earnings in late June and July will reveal whether AI infrastructure spending holds at projected levels or faces delays as CFOs reassess project returns. Energy transition funding approvals through the Department of Energy’s loan programs office will indicate whether government capital fills private market gaps. Critical minerals project announcements with EXIM or DFC backing will test whether geopolitical premium translates to actual financing at scale. Copper and lithium price movements will signal whether commodity inflation pressures ease or entrench further cost headwinds.