U.S. Treasury yields stay elevated as deficits, policy risk and AI borrowing pressure debt markets

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Highlights

10-year U.S. Treasury yield hovers near 4.8%, up three quarters of a percentage point in six months as private investors demand higher compensation amid waning central bank participation.
Large tech firms, Nvidia, and related SPVs have issued about $320 billion in new debt this year, intensifying competition for capital and contributing to higher long-term yields.
The Congressional Budget Office projects a $2.1 trillion fiscal deficit for 2024, with U.S. debt seen reaching $41.1 trillion by mid-2027 and some major holders like Norway’s sovereign wealth fund reallocating away from Treasurys.

Forces keeping long-term yields high

As reported by CNBC, investors are demanding greater compensation to hold long-dated U.S. government debt as the buyer base becomes more price-sensitive and some foreign holders reassess the market. That shift comes as central banks and reserve managers play a smaller role than in earlier years, leaving more of the market in the hands of private investors focused on return and risk.

The yield on the 10-year U.S. Treasury note has climbed by about three quarters of a percentage point over the past six months and lately hovers near 4.8%, the highest level of Trump’s second administration. The Treasury Department is set to increase buybacks of some long-term debt next week to support market liquidity, while investors are also adjusting rates based on how new Federal Reserve Chair Kevin Warsh may respond to inflation that remains above the Fed’s 2% target.

Ludovic Subran, chief investment officer and chief economist at Allianz, says investors naturally want better pricing to lend to the U.S. He points to rising budget and trade deficits, concern about Fed independence and Treasury market intervention as factors that are adding something closer to credit risk to U.S. debt, even if he does not expect an outright default.

AI funding and deficits intensify capital competition

Competition for capital is also rising because large technology groups are issuing substantial amounts of debt to finance chips and data centers tied to artificial intelligence. J.P. Morgan estimates that five major tech firms, Nvidia, and special-purpose vehicles supporting data-center leases have issued about $320 billion in debt so far this year.

Michael Cembalest, chairman of market and investment strategy at J.P. Morgan Asset Management, says that level of issuance by hyperscalers may be creating a supply-demand imbalance at the long end of the yield curve. Higher Treasury yields are feeding through to household borrowing costs as mortgage rates approach 6.8%, with auto loans and other consumer debt also moving in line with the 10-year yield.

Political risks remain in place as Washington shows little appetite for the compromises that could curb deficit spending. The Congressional Budget Office recently raised its forecast for the fiscal year deficit to $2.1 trillion, likely above 6% of gross domestic product, while the U.S. is projected to reach its $41.1 trillion debt limit between late winter and mid-summer 2027.

Some major investors are also looking beyond Treasurys for better returns. Norway’s sovereign wealth fund is considering shifting roughly $80 billion from government debt into other bond sectors such as mortgage-backed securities, adding to signs that lower U.S. yields may be difficult to achieve without a broader slowdown in economic activity.

We previously reported on Norway’s sovereign wealth fund proposal to reduce the government-bond share of its fixed-income portfolio and, in turn, cut its exposure to U.S. Treasurys. The plan would reallocate more capital toward higher-yielding non-government assets such as corporate bonds and mortgage-backed securities, a shift that also signaled waning support from large, traditionally stable buyers in a Treasury market already focused on deficits and heavy issuance.

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