This week, the benchmark 10-year Treasury yield rose sharply to 5.23%, marking its highest level since 2007. This increase is attributed to a combination of factors, including stubborn inflation and a significant rise in bond supply driven by both government debt issuance and corporate borrowing for artificial intelligence infrastructure.
The Federal Reserve's potential for further tightening is underscored by a 64% likelihood of a rate hike in October, as indicated by Fed funds futures trading. Additionally, the University of Michigan's consumer sentiment index revealed a rise in year-ahead inflation expectations to 4.6% in September, up from 4% in August.
Thierry Wizman, a global FX and rates strategist at Macquarie Group, noted that while inflation and rate hike expectations contribute to rising yields, the current bond issuance levels are a more significant factor.
The federal government is increasing debt to cover a large deficit, while companies in the AI sector have issued approximately $132 billion in debt this year, a stark increase from the average of $35 billion annually from 2020 to 2024. This trend could see total AI-related debt issuance reach between $300 billion and $570 billion this year.
Higher yields could negatively impact stock prices by increasing borrowing costs for companies and making bonds more appealing to investors seeking income. Wizman suggests that the capital spending plans of major tech companies will likely keep bond issuance high, potentially pushing yields even higher in the future