AI debt boom 'reverse crowding' Treasury yields

The U.S. national debt stands at $40 trillion, with deficits headed toward $2 trillion and annual debt servicing at $1 trillion. Yet AI hyperscalers are still able to issue corporate debt easily, even as Treasury absorbs massive borrowing. This unusual dynamic has flipped the traditional crowding-out narrative, as noted by Ed Yardeni and echoed by Fidelity's Jurrien Timmer and Federal Reserve Chair Kevin Warsh.

The flood of corporate debt, largely for AI infrastructure, has kept corporate bond yields low relative to Treasuries. Instead, Treasury yields have risen to clear the market, potentially fueling a feedback loop of higher debt costs and larger deficits. While other factors like deficits, oil prices, and a strong economy also affect yields, the AI debt boom is now a significant contributor.

S&P Global's warning about market fatigue suggests the trend may not continue indefinitely. If investors become more cautious about rising leverage, corporate bond spreads could widen, possibly easing pressure on Treasury yields. This is a key development to monitor for both bond markets and the broader economy.