5 minEconomy
AI hyperscalers’ debt boom is pushing up Treasury yields, analysts say
Wall Street analysts say the surge in AI-related corporate bond issuance is creating a 'reverse crowding out' effect, pushing Treasury yields higher as capital flows into corporate debt instead of government bonds.
The rapid build-out of artificial intelligence infrastructure is reshaping the U.S. bond market in an unexpected way, with analysts now describing a “reverse crowding out” effect that is pushing Treasury yields higher. For years, economists worried that a soaring national debt would drain capital away from private businesses. Instead, the opposite is happening: AI hyperscalers are flooding the market with corporate debt, and the government is having to compete harder for investor dollars.
U.S. debt has reached $40 trillion, the federal budget deficit is on track to hit $2 trillion this fiscal year, and debt-servicing costs alone amount to $1 trillion annually. That requires the Treasury Department to raise enormous sums from the bond market, traditionally a key source of financing for corporate giants as well. Yet AI companies are still issuing plenty of their own debt in the race to buy chips, build data centers, and lay down other infrastructure, according to Wall Street veteran Ed Yardeni.
In a note published Monday, Yardeni pointed out that U.S. investment-grade corporate bond issuance totaled about $1.7 trillion in the year to date through July, roughly 27% above last year’s pace and on track to exceed $2 trillion for the first time. A flood of corporate debt that massive would typically require yields to offer a bigger premium over risk-free bonds to attract buyers. But in the case of AI-related bonds, demand has been so high that the yield spread has remained compressed, barely widening for an additional premium.
“As a result, the market has adjusted not through higher corporate borrowing costs relative to Treasuries but through higher Treasury yields themselves. Capital flowing into corporate bonds is capital not flowing into Treasuries, and Treasury yields have had to rise to clear the market,” Yardeni explained. “In short, the AI revolution is producing a classic crowding-out effect, causing Treasury yields to rise.”
Treasury Secretary Scott Bessent, who has described himself as America’s top bond salesman, has taken note of the eagerness with which AI companies are offering debt, regardless of borrowing costs. “We are also seeing big corporate issuance. And a lot of that corporate issuance, I would say, is almost yield-agnostic, because the build-out for AI, the returns on that, the companies believe they’re going to be so high. They don’t really care what they’re paying,” he said recently.
Federal Reserve Chairman Kevin Warsh also acknowledged the trend during his speech at the Jackson Hole conference on Friday, saying, “Ever-expanding pools of capital are pouring into AI-related infrastructure of all sorts.” International capital-flow data show that net purchases of U.S. corporate bonds by private-sector foreign buyers have exceeded their purchases of Treasury debt over the past year, according to Yardeni.
Jurrien Timmer, director of global macro at Fidelity Investments, commented on X that “The reverse crowding out in the corporate bond market has even gotten the Treasury Secretary’s attention.” Private credit is also financing the AI boom, while chipmaker Nvidia is leveraging its balance sheet to back AI deals. So-called hidden borrowing has exploded, with one tally putting it at $1.65 trillion.
Higher Treasury yields could eventually fuel a feedback loop where rising debt-servicing costs expand deficits further, adding to the pile of U.S. debt, which in turn pushes yields up further. To be sure, the rise in Treasury yields has been attributed to a variety of factors in addition to the AI debt surge, including massive federal budget deficits, higher oil prices due to the Iran war, and a robust U.S. economy continuing to put upward pressure on inflation.
Still, markets are showing some signs of fatigue after absorbing the flood of debt in such a short time. S&P Global warned last month that hyperscalers are paying a higher premium compared with yields on risk-free bonds. “Market participants are growing leery of quickly rising leverage from issuers previously characterized by strong and reliable cash flow,” the report said.
