As the U.S. Treasury continues to expand its financing, the pressure in the bond market has not initially fallen on corporations. With rising investment in AI infrastructure, major tech companies are accelerating bond issuance, drawing funds away from U.S. Treasuries and placing new upward pressure on Treasury yields.
Corporate bond issuance has significantly accelerated.
Fortune, citing market participants, said that hyperscale cloud providers continue to raise substantial funds to purchase chips, build data centers, and deploy related infrastructure. The U.S. national debt has reached $40 trillion, with this fiscal year’s budget deficit projected to approach $2 trillion and annual interest payments around $1 trillion.
U.S. Treasury Secretary Scott Bessent recently stated that corporate bond issuance is currently very high, with a significant portion related to AI investments. These companies are not particularly sensitive to financing costs, as they believe the future returns on AI investments will be sufficiently high.
- As of July, investment-grade corporate bond issuance for the year totaled approximately $1.7 trillion.
- Approximately 27% faster than the same period last year
- Annual volume may exceed $2 trillion for the first time.
Fund diversion pushes up U.S. Treasury yields
Wall Street veteran market analyst Ed Yardeni believes that this market correction has not been primarily reflected in a significant widening of corporate bond spreads, but rather in rising U.S. Treasury yields. Funds flowing into corporate bonds have not entered the Treasury market, forcing the Treasury Department to accept higher yields to complete its financing.
Following this logic, the AI investment boom is exerting "reverse pressure" on U.S. Treasuries through corporate financing channels. If yields continue to rise, the U.S. government’s interest expenses will increase, expanding deficit pressures and further boosting future debt issuance needs.
There are other drivers besides AI
The report noted that the rise in U.S. Treasury yields is not solely driven by AI-related bond issuance. Factors already priced in by the market include the steadily widening fiscal deficit, rising oil prices due to the Iran conflict, and the U.S. economy's resilience supporting inflation.
However, Yardeni noted that over the past year, net purchases of U.S. corporate bonds by foreign private sector investors have exceeded their net purchases of U.S. Treasuries. Jurrien Timmer, Global Macro Director at Fidelity Investments, also said that this “reverse squeeze” in the corporate bond market has drawn the attention of senior officials at the U.S. Treasury.
The market is beginning to show signs of fatigue.
Beyond the public bond market, private credit is also funding AI expansion. Reports indicate that NVIDIA is even using its own balance sheet to support AI deals, with the so-called "hidden borrowing" rapidly growing to an estimated $1.65 trillion.
S&P Global last month indicated that markets are beginning to show signs of strain after absorbing a large volume of debt in a short period. The report noted that the spreads currently paid by hyperscale cloud providers are higher than previous levels, and some investors are growing cautious about the rapid increase in leverage among issuers that were previously known for stable cash flows.