Surging Bond Supply Drives Yields Higher
US 10-year Treasury yields are testing 5 percent. This is the first time since 2007.
The yield on 10-year U.S. Treasury notes is testing 5 percent. This is the first time since 2007. Investment-grade corporate bonds yield close to 6.5 percent. Rising supply is the primary driver. The Treasury expects to borrow $739 billion in Q3. This figure is $68 billion higher than prior estimates.
Total net borrowing for the second half of the year reaches $1.367 trillion. This includes $628 billion in the fourth quarter. The market is reacting to this volume. Prices fall as supply outpaces demand. This dynamic is not unique to the government sector. Private issuance is also surging.
Government issuance hits decade highs
Total Treasury issuance reached $32.8 trillion in the last 12 months. This compares to $8.3 trillion in 2016. The Securities Industry and Financial Markets Association reports these figures. New Treasury bonds have grown by an average of 14.7 percent annually. The government relies more on short-term debt. Treasury bills now make up 85 percent of issuance.
In 2016, T-bills were 75 percent of total issuance. T-bill issuance is up 12.4 percent year-over-year. Issuance of 10-year notes increased by 9.3 percent. Long-term bonds of 20 to 30 years rose by only 4.1 percent. The shift toward short-term debt changes the risk profile. It also increases refinancing pressure.
Corporate debt fuels AI buildout
Corporate bond issuance averages a 5.4 percent annual increase since 2016. Total issuance hit $2.7 trillion in the last 12 months. This is nearly 30 percent higher than the same period last year. Convertible bond issuance rose by 49 percent. Technology sector deal volume has surged over three years.
Companies are borrowing to finance AI infrastructure. Data center construction drives this demand. Bloomberg reports a significant increase in deal counts. This private sector activity adds to the overall bond supply. It competes with government debt for investor capital. The combined effect is a squeeze on prices.
Inflation and default risks rise
Higher yields reflect inflation risk. They also reflect default risk. Tech hyperscalers face increased scrutiny for their debt loads. The government faces funding shortfalls. Budget deficits require more borrowing. This creates a feedback loop. More issuance leads to higher rates. Higher rates increase the cost of that issuance.
GN markets/rates (en-US) notes the structural imbalance. Demand for bonds is not keeping pace with supply. This is true for both public and private sectors. The market is pricing in this reality. Investors demand higher compensation for holding these assets. The result is a sustained upward trend in yields.
