The US Treasury market, one of the largest globally with $1.2 trillion traded daily, is experiencing a "toxic stew" of influences, including inflation, wars, budget deficits, and AI investments. This has led to a significant spike in yields, with the 30-year Treasury reaching a two-decade high and the 10-year benchmark climbing over half a percentage point since May. Treasury Secretary Scott Bessent's efforts to drive down rates through bond buybacks have been largely ineffective and criticized by economists and financiers.
Adding to the pressure on the Treasury market is the increasing demand for capital from Big Tech companies investing in AI infrastructure. This competition for funds has created a "reverse crowding out" phenomenon, where corporate bond offerings are absorbing investor funds that would typically go into the Treasury market. For instance, Alphabet has issued various foreign-denominated bonds, including a 100-year bond in British pounds, demonstrating their aggressive pursuit of funds for AI development.
Data from the London Stock Exchange Group shows that US Treasury issuance of bonds maturing in over 20 years decreased by 26% to $229.6 billion from January to August. In contrast, dollar-denominated investment-grade corporate bond issuance surged by 78% to $263.7 billion during the same period. Technology companies, specifically, saw their corporate bond issuance skyrocket from $16 billion in 2024 to $61.1 billion this year, increasing their market share from 6.1% to 24.1%. This shift in investor funds is contributing to higher long-term US interest rates, with the 30-year Treasury yield trading in the 5.3% range this month, its highest level since 2007.
The repercussions of these market dynamics are significant for government borrowing costs. On September 15, government borrowing costs hit their highest level since the 2008 financial crisis, with 10-year US Treasury yields surpassing 5%. A recent auction of 20-year US bonds saw the government pay a record-breaking 5.42% interest yield-to-maturity, the most expensive cost of capital for this maturity since 1986. Furthermore, foreign investors bought the lowest percentage ever of that $13 billion auction, indicating a thinning demand and liquidity for US sovereign debt. This situation highlights the tension between growing global debt loads and current market conditions, prompting concerns that the Federal Reserve may need to consider the rising government interest costs in its monetary policy deliberations, though direct intervention to bail out the market is seen as unlikely given its conflict with inflation-fighting efforts.
