AI debt surge absorbs capital and pushes U.S. Treasury yields higher
Unprecedented corporate bond issuance to fund artificial intelligence infrastructure is diverting capital away from government debt, forcing U.S. Treasury yields higher to attract buyers.
Artificial intelligence hyperscalers are issuing corporate debt at a record pace to fund infrastructure buildouts. This surge is diverting investment capital away from U.S. government bonds and forcing Treasury yields higher to attract buyers.
U.S. investment-grade corporate bond issuance reached roughly $1.7 trillion in the year through July. This represents a 27% increase from the previous year and puts the market on track to exceed $2 trillion for the first time, according to Wall Street veteran Ed Yardeni.
Normally, such a massive flood of debt would require issuers to offer a larger premium over risk-free bonds to attract buyers. However, demand for AI-related debt remains so strong that yield spreads have stayed compressed.
“As a result, the market has adjusted not through higher corporate borrowing costs relative to Treasuries but through higher Treasury yields themselves,” Yardeni noted. “Capital flowing into corporate bonds is capital not flowing into Treasuries, and Treasury yields have had to rise to clear the market.”
This dynamic creates a reverse crowding-out effect where private sector borrowing pushes up government borrowing costs. Higher Treasury yields could eventually fuel a feedback loop, expanding debt-servicing costs and widening the federal budget deficit further.
The U.S. national debt currently sits at $40 trillion, with debt servicing costs reaching $1 trillion annually. The federal budget deficit is also on track to hit $2 trillion this fiscal year.
Treasury Secretary Scott Bessent has acknowledged the aggressive borrowing behavior of technology firms. “We are also seeing big corporate issuance,” he said, noting that companies believe AI returns will be so high they do not care what they are paying.
Bessent has billed himself as America’s top bond salesman amid this shifting market dynamic. The Treasury Department must continuously raise funds from the bond market to finance the government's massive obligations.
Jurrien Timmer, Fidelity Investments director of global macro, noted on X that this reverse crowding out has captured the Treasury Secretary’s attention. Federal Reserve Chairman Kevin Warsh also addressed the debt boom at the Jackson Hole conference on Friday.
Warsh observed that ever-expanding pools of capital are pouring into AI-related infrastructure of all sorts. Chipmaker Nvidia is even leveraging its balance sheet to back these deals, alongside private credit and $1.65 trillion in hidden borrowing.
Despite the current appetite, markets are showing signs of fatigue after absorbing the debt so quickly, S&P Global warned last month. “Market participants are growing leery of quickly rising leverage from issuers previously characterized by strong and reliable cash flow,” the report stated.
Hyperscalers are already paying a higher premium compared to risk-free bonds, according to the rating agency. Other factors driving up Treasury yields include the robust U.S. economy, higher oil prices from the Iran war, and persistent federal deficits.
