As the U.S. Treasury Department continues to expand financing, the pressure on the bond market has not initially fallen on corporations. With the increase in AI infrastructure investment, large technology companies are accelerating their bond issuance, and some funds are shifting from U.S. Treasurys to corporate bonds, putting new upward pressure on the yields of U.S. Treasurys as a result.
The issuance of corporate bonds has significantly accelerated.
Fortune Quoting market experts, ultra-large-scale cloud service providers are still raising substantial funds to purchase chips, build data centers, and lay out related infrastructure. The scale of U.S. national debt has reached 40 trillion dollars, with the budget deficit for this fiscal year expected to be close to 2 trillion dollars, and annual interest expenses amounting to about 1 trillion dollars.
U.S. Treasury Secretary Scott Bessent recently stated that the current scale of corporate bond issuance is quite large, and a considerable portion of it is related to AI investments. Such companies are not very sensitive to financing costs because they believe that the future returns on AI investments are high enough.
- As of July, approximately $1.7 trillion in investment-grade corporate bonds were issued this year.
- About 27% faster than the same period last year
- The annual scale has for the first time exceeded $2 trillion.
Capital diversion drives up U.S. Treasury yields
A senior Wall Street market expert, Ed Yardeni, believes that this round of market adjustment has not mainly reflected in a widening spread between corporate bonds, but rather in an increase in the yield of U.S. Treasury bonds. The funds flowing into corporate bonds have not entered the U.S. bond market, and in order to complete financing, the Treasury Department has had to accept higher yields.
According to this logic, the AI investment boom is exerting a "reverse squeeze" on U.S. Treasury bonds through corporate financing channels. If interest rates continue to rise, the U.S. government's interest payments will increase, putting further pressure on the deficit and further driving up the demand for future bond issuance.
There are other promoters besides AI.
The report mentions that the rise in U.S. Treasury yields is not solely driven by AI's bond issuance. The continuously expanding fiscal deficit, the increase in oil prices due to the Iran war, and the resilience of the U.S. economy in supporting inflation are all factors that the market has already taken into account in its trading decisions.
However, Yardeni pointed out that in the past year, the net purchases of US corporate bonds by overseas private sector investors have exceeded their net purchases of US Treasury bonds. Jurrien Timmer, the head of global macro at Fidelity Investments, also stated that this "reverse squeeze" phenomenon in the corporate bond market has attracted the attention of senior officials at the US Treasury Department.
The market begins to show signs of fatigue.
In addition to the public bond market, private credit is also providing funding for the expansion of AI. Reports indicate that NVIDIA is even using its own balance sheet to support AI transactions, and the so-called "hidden borrowing" has also rapidly expanded, with statistics showing it has reached 1.65 trillion dollars.
Standard & Poor's Global warned last month that after the market absorbed a large amount of debt in a short period of time, it began to show signs of fatigue. The report pointed out that the current interest rate spreads paid by hyperscale cloud providers are higher than before, and some investors are wary of the rapid increase in leverage among these issuers, which previously had stable cash flows.
