Zachary Griffiths, head of investor-grade bonds and macro strategy at CreditSights, asserts that the United States is still far from a full-blown crisis of confidence in its debt, despite rising yields on 30-year US Treasury bonds reaching their highest level in nearly 20 years (5.34%) and 10-year Treasury yields approaching their January 2025 peak. He attributes the current market situation to a mechanism repricing the term premium higher, influenced by Treasury interventions to lower rates and the Federal Reserve's transition period. Griffiths suggests that a rise in 10-year Treasury yields to 6% or higher would be a negative outcome for market confidence, but believes it would be quickly bought down without a major shock.
Griffiths identifies several factors contributing to the elevated cost of US government debt. These include heightened inflation expectations, the Federal Reserve's monetary policy outlook, and a significant increase in debt issuance by hyperscalers. These companies are heavily relying on long-term borrowing to finance their artificial intelligence infrastructure, consuming savings and consequently driving up US government bond yields. This AI-related issuance, while not the sole cause, is having an outsized impact given other contributing factors.
Adding to the complexity, the US economy and corporate profits have been stronger than anticipated, with US corporate profits reaching a record $4.8 trillion in the second quarter of 2026, representing 18% of national income—the highest share since World War II. While this is a positive development for investors, it poses a challenge for US authorities who face the problem of financing persistently high budget deficits, expected to remain in the 5-6% range.
Analysts note that while bond yields may eventually decline, this is unlikely in the near term, with continued volatility expected. UBS Global Wealth Management estimated earlier that 30-year and 10-year Treasury yields would reach 5% and 4.5%, respectively, by the end of the year. The market is approaching a point where the budget deficit and higher borrowing costs may compel lawmakers to adopt a more fiscally responsible approach, although such transitions take time.
In a related development, BNP Paribas analysts predict that the corporate bond rally will end when technology companies, heavily investing in AI and data centers, saturate credit markets with too much debt. This aligns with the observation that companies are aggressively ramping up borrowing in bond markets, with over $70 billion raised in a single day, as borrowers seek to secure funding before costs escalate further. For instance, Amazon.com Inc. launched its debut sterling bonds to fund AI initiatives.
