Original Author: Xu Chao
Original Source: Wall Street News
As the U.S. Treasury market catches a brief respite, a more significant stress test is quietly approaching.
The U.S. Treasury Department yesterday announced an expansion of its long-term Treasury buyback program, temporarily easing market jitters that had pushed the 30-year bond yield above 5.3%. However, market participants warn that the effectiveness of this intervention may be short-lived—the AI infrastructure financing wave driven by tech giants is set to surge after the Labor Day holiday in September. At that time, U.S. investment-grade corporate bond issuance is expected to hit $200 billion, potentially posing a new round of pressure on the already strained Treasury market.
Nicholas Elfner, Co-Head of Research at Breckinridge Capital Advisors, stated: "The period after Labor Day and the back-to-school season has historically been a busy time for the U.S. investment-grade corporate bond primary market." He noted:
With the growth of mega-deals among hyperscalers, a total issuance of $200 billion in September seems achievable, although this will depend on the delicate balance between supply and demand, and a degree of stability in the Treasury market.
Several asset managers pointed out that U.S. investment-grade corporate bond issuance has already increased by 38% year-to-date and is on track to reach a record $2.1 trillion for the full year. A significant portion of this is flowing into AI-related capital expenditures. Andrzej Skiba, Head of Fixed Income at RBC Global Asset Management, said that the current supply of AI-related bonds is already "close to the limit of not disrupting the market." This wave of supply, combined with the expansion of the U.S. fiscal deficit, rising inflation expectations, and uncertainty around Fed policy, is reshaping the supply-demand dynamics of the fixed income market.
Treasury Steps In, But Efficacy Questioned
The U.S. Treasury Department announced this week that it will significantly expand its long-term Treasury buyback program, launched in 2024, starting next month. The move provided an immediate boost to market sentiment—stocks rebounded from a three-day losing streak, gold and bitcoin rose in tandem, and the 10-year Treasury yield retreated slightly.
However, several analysts remain cautious about the intervention's effectiveness. John Briggs, Head of U.S. Rates Strategy at Natixis, noted that the planned Treasury purchase size is less than 3% of outstanding long-term bonds and below 30% of this year's projected issuance. "More important is the signaling effect—the market now knows some of the Treasury's pain points," he said, "But the long-term structural pressures have not changed and will continue to push yields higher."
Some market participants see the buyback as an attempt by authorities to suppress long-end rates. Even so, the 10-year Treasury yield remains around 4.64%, well above the 4% level seen in early March when the Iran conflict erupted.
AI Financing Wave Reshapes Corporate Bond Market
The AI infrastructure arms race has become the core driver of this round of corporate bond issuance frenzy. Microsoft, Alphabet, Amazon, Meta, and Oracle have been issuing large-scale long-term corporate bonds since last fall to fund investments in data centers, advanced chips, and AI services.
According to Goldman Sachs analysts' projections, AI-related debt (including investment-grade, high-yield, and leveraged loan markets) could reach $322 billion by 2026. However, by late July, this total had already approached $500 billion. JPMorgan, meanwhile, forecasts that hyperscale cloud and data center financing will reach $400 billion in 2026, a significant increase from the $320 billion expected at the end of last year.
These tech giants are also extending their reach into markets they typically don't frequent, including the euro-denominated investment-grade bond market. According to Goldman Sachs data, hyperscale cloud companies now account for 21% of the total issuance of Canadian investment-grade bonds and 19% of Swiss franc-denominated investment-grade corporate bonds. Steve Boothe, Global Investment-Grade Bond Portfolio Manager at T. Rowe Price, warns: "If next year repeats this year's scenario, bond market volatility in the second half will intensify further, and yields will also continue to climb."
Supply-Demand Imbalance and Competitive Pressure
The massive supply of AI corporate bonds is forming direct competition with long-term Treasuries.
Skiba points out that AI corporate bonds are typically long-term, and the issuing entities sometimes have credit ratings even higher than that of the U.S. federal government, creating a substitution effect for long-term Treasuries. Skiba also notes that tech companies are exploring off-balance-sheet financing channels, including large-scale financings for specific data center projects and innovative structures like chip-secured financing.
Brij Khurana, Fixed Income Portfolio Manager at Wellington Management, uses the term "flood" to describe the current situation—new deals are emerging daily, not only from the hyperscalers themselves but also from various companies across the AI supply chain. Khurana also notes that as these companies pour massive financing into AI capital expenditures, it's "hard for the macroeconomy to fall into a recession," which favors stock market sentiment but diminishes the appeal of the bond market.
Henry Song, Portfolio Manager at Diamond Hill, directly addresses the core current contradiction: "From a bond investor's perspective, the key question is where to put money to generate value."
Risk Accumulation, Historical Shadows Emerge
Beneath the surface of market exuberance, risk signals are accumulating. Although this year's yield increases have somewhat contained the widening of credit spreads, once the upward trend in Treasury yields is halted, the risk of corporate bond sell-offs will rise accordingly, pushing credit spreads higher.
Some investors have expressed concerns about the similarities between the AI financing boom and the dot-com bubble of the 2000s, warning that the pace of capital deployment may outstrip the business models' ability to generate returns. Hank Smith, Chief Investment Strategist at Haverford Trust, is particularly concerned about the resurgence of off-balance-sheet financing models, saying it reminds him of the banking industry in the mid-2000s—which "ended up costing a heavy price."
Additionally, inflation pressure cannot be ignored. Driven by higher energy prices due to the Iran conflict, UK inflation rose to 2.9% in July, and Eurozone inflation similarly climbed to 2.9%. Market expectations for a 25-basis-point rate hike by the European Central Bank in September have reached 96%. In the U.S., the policy stance of new Federal Reserve Chair Kevin Warsh remains highly uncertain, compounded by the U.S. total debt exceeding $40 trillion. These factors all constitute ongoing pressure sources for long-end rates.
Breckinridge Capital Advisors' Co-Head of Research Nicholas Elfner concludes that whether corporate bond issuance reaches the expected $200 billion in September "will depend on the delicate balance between supply and demand, and the overall stability of the Treasury market." Against the backdrop of unclear prospects for AI investment returns, the fragility of this balance may face a true market test in September.
