AI investment boom drives 40% of rise in U.S. long-term Treasury yields, estimate says

The surge in artificial intelligence investment is reshaping the competition for long-term debt investors, with new corporate bonds from major technology companies drawing demand away from U.S. Treasuries.

Bank of America estimated on Sept. 1 that expanded issuance by five hyperscalers, Oracle, Meta, Google, Microsoft and Amazon, had raised the 10-year Treasury yield by about 30 basis points this year. The companies have increased issuance of corporate bonds and mortgage-backed securities to finance AI-related investment.

The 10-year Treasury yield stood at 4.805% at 5 p.m. on Sept. 2, its highest level since January of the previous year. Compared with a starting point of roughly 4.0% to 4.1%, the yield has risen by about 70 to 80 basis points. The estimated AI-related effect therefore accounts for around 40% of the increase.

“

U.S. Treasuries have been losing their price premium over the highest-quality corporate bonds, such as AAA-rated bonds, and major other developed-country government bonds since 2020. They appear to be moving partly away from the traditional characteristics of a safe-haven asset.

Goldman Sachs estimates that AI-related bonds represent about 24% of total U.S. investment-grade bond issuance this year, or roughly $370 billion. Some institutional investors have reduced their Treasury holdings while buying long-term bonds issued by hyperscalers. That shift comes as federal government debt has exceeded $40 trillion, adding to concerns about the supply of Treasuries needed to finance fiscal deficits.

The composition of Treasury ownership has also changed. The International Finance Center said foreign public-sector holdings, including those of central banks, fell from $4.2 trillion in early 2020 to $3.8 trillion in June. Overseas private-sector holdings by pension funds, hedge funds and asset managers rose from $2.9 trillion to $5.5 trillion over the same period. The center said private investors are more sensitive to yield changes and demand greater compensation for holding long-term debt.

A Federal Reserve model estimated that the 79-basis-point increase in the 10-year nominal yield between March and July came partly from a 30-basis-point rise in expected real short-term rates and a 26-basis-point rise in the real term premium. The article says these figures point to fiscal conditions, Treasury issuance and the compensation investors seek for long-term risk, rather than inflation expectations alone. Stanford professor Hanno Lustig has argued that since 2020 the premium on Treasuries over top-rated corporate bonds and other major developed-market government bonds has narrowed, suggesting that investors are reassessing the debt as an asset carrying some fiscal risk.

“

As the private sector’s share of holdings expands, sensitivity to changes in yields, or Treasury price movements, is increasing, and the level of compensation demanded for the risks of investing in long-term government bonds is also rising.