The U.S. Treasury bond market, a global giant with $1.2 trillion traded daily, is signaling mounting economic worries as 30-year yields recently hit a two-decade high and 10-year yields have climbed over half a percentage point since May. This upward creep in rates is drawing criticism from Treasury Secretary Scott Bessent, who has attempted to mitigate the rise through bond buybacks, an effort that economists widely view as ineffective. This volatility in the Treasury market is part of a "toxic stew" influenced by factors such as inflation, geopolitical conflicts, budget deficits, and demographic shifts.
A significant factor contributing to the rise in Treasury yields is the increasing competition for funds from major technology companies. These firms are issuing high-yield corporate bonds to finance artificial intelligence infrastructure, siphoning off investor demand that traditionally flowed into the U.S. ultra-long bond market. This phenomenon, dubbed "reverse crowding out," sees companies encroaching on the government's funding channels. For instance, dollar-denominated investment-grade corporate bond issuance surged by 78% to $263.7 billion from January to August, while Treasury issuance for bonds over 20 years fell by 26% to $229.6 billion in the same period. Technology companies alone saw a massive increase in corporate bond issuance, from $16 billion in 2024 to $61.1 billion this year, claiming 24.1% of the market share.
Alphabet, Google's parent company, exemplifies this trend by actively issuing bonds in various currencies, including a notable 100-year bond in British pounds. The perceived urgency to invest in AI means these companies are securing funds regardless of the widening spread they must pay above Treasury yields. This shift in investor preference from Treasury bonds to corporate bonds, particularly in the ultra-long segment, is expected to continue driving up long-term U.S. interest rates, with the 30-year Treasury yield already trading in the 5.3% range this month, the highest since 2007. The recent U.S. 20-year bond auction saw its worst showing ever, with the government paying a record-breaking 5.42% interest yield-to-maturity, the highest since 1986, and foreign investors buying the lowest percentage on record.
The Federal Reserve is grappling with these surging government bond yields, which are increasing credit costs across the U.S. economy. While these yields will likely influence monetary policy deliberations, analysts believe the Fed will resist any explicit calls from the Trump administration to intervene in the market. Directly buying bonds to cap yields would conflict with the Fed's primary objective of combating inflation, despite some arguments that the central bank should consider rising government interest costs more closely. The Fed is expected to raise interest rates for the first time since 2023, further pressuring bond yields.
