The yield on 10-year U.S. Treasury notes is testing 5% for the first time since 2007, while investment-grade corporate bonds are yielding close to 6.5%.
This increase in yields comes as the Treasury announced in early August that it expects to borrow $739 billion in privately held net marketable debt during the July–September quarter, which is $68 billion higher than it announced in May.
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During the fourth quarter, the Treasury expects to borrow $628 billion in privately held net marketable debt, for a total of $1.367 trillion net borrowing over the second half of this year.
Net borrowing is only part of the total requirements, however, with the Treasury needing to roll over maturing securities.
The Treasury Department’s announcement put new pressure on bond prices and contributed to the bond market selloff—but it’s not the only reason for the selloff.
The selloff, after all, is a reflection of the imbalance between the demand for bonds and the increased supply of bonds and the eventual squeezing out of investment.
In this latest era of rising interest rates, the bond market is dealing not only with the increased risk of inflation, but also the flood of bond issuance in recent years that has increased the supply of bonds.
It’s not just the government sector that is flooding the bond market. The private sector has issued increased levels of debt to finance the build-out of AI infrastructure.
As with any asset, the greater the supply compared with its demand, the lower the price.
For the government, the increased issuance is a symptom of the shortfall of revenue compared with the need to finance surging budget deficits.
For the private sector, the increased issuance reflects investments in productivity not only coming out of the pandemic but also, now, the need to finance the AI boom.
Treasury market issuance
Total issuance of Treasury notes and bonds has increased from $8.3 trillion in 2016 to $32.8 trillion over the 12 months ending in August, according to the Securities Industry and Financial Markets Association.
That is an average 14.7% increase of new Treasury bonds in each of the last 10 years.
With long-term interest rates moving higher, the Treasury is financing its increased debt with lower-yielding short-term Treasury bills.
In 2016, T-bills made up 75% of total issuance. This year, that has increased to 85%.
And also this year, T-bill issuance has increased by 12.4% compared with the first eight months of last year.
Issuance of Treasury notes out to 10-year maturities has increased by 9.3% while issuance of bonds of 20-year to 30-year maturities has increased by only 4.1%.
Corporate bond market issuance
Corporate bond issuance has increased by an average of 5.4% in each of the 10 years since 2016. This includes the large pandemic-induced spike in 2020 and then the drop-offs in 2021 to 2022 before the economic recovery took hold again.
In 2016, total corporate issuance was $1.6 trillion. That has increased to $2.7 trillion in the 12 months to this August, which is nearly 30% higher than the same period a year earlier.
We note that the 2026 increase includes a 49% rise in convertible bond issuance, which allows for transferring the investment into equity in the firm.
We also note the increase in bond issuance in the technology sector, with a surge in deal counts and volume over the past three years as reported by Bloomberg.
This aligns with the rapid build-out of data centers, necessary for the AI applications.
The takeaway
The increase in bond yields reflects the growing risk in holding a security whose value in the future will be subject to higher inflation, a rising risk of default now assigned to the tech hyperscalers, and, in the case of the U.S. government, the increased risk of insufficient funding needed to feed its growing budget deficits.
To that point, the Treasury expects to borrow a total of $1.367 trillion over the second half of this year, which will be in addition to the amount necessary to cover the rolling over of existing debt.
The rapid increase in bond issuance in the government and tech sectors implies the eventual squeezing out of investment in other sectors as the cost of debt increases.
