TBAC says AI borrowing does not crowd out U.S. Treasury demand

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AI borrowing and Treasury demand

Highlights

TBAC reports no evidence that 2026 technology-related issuance is crowding out demand for long-end U.S. Treasuries, attributing higher yields to growth, policy expectations, and energy prices.
Foreign demand for U.S. fixed income has increased in 2024, with TBAC noting that a broader investor base and potential shifts by underweight households and pensions could absorb projected borrowing.
TBAC finds that increased use of Treasury derivatives by asset managers, insurers, and pensions is expanding market access and recommends easing bank balance-sheet constraints and expanding repo market access to support Treasury demand.

TBAC assessment on Treasury demand

As reported by Reuters, the Treasury Borrowing Advisory Committee says Treasury auction results show no evidence that 2026 technology-related issuance has crowded out demand for long-end U.S. Treasuries. In a statement released on Wednesday for the U.S. quarterly refunding, the committee says that if technology investment is affecting rates, the effect comes through stronger growth rather than through direct crowding out.

The committee says higher yields mainly reflect growth, policy expectations and energy prices. It adds that heavy technology issuance and uncertainty over future financing needs have widened spreads in the sector and increased competition for long-duration capital.

TBAC also says foreign investors' demand to finance U.S. technology is adding to dollar strength and contributing to tighter financial conditions. It notes that large issuance windows may also influence Treasury concessions and hedging flows at the margin.

Market capacity and policy recommendations

At the same time, the committee says foreign demand for U.S. fixed income has picked up this year and that a broader investor base can absorb more supply. It says households and private pensions remain underweight bonds, meaning even modest shifts away from cash and equities could absorb much of the projected borrowing.

TBAC also examines the growing use of Treasury derivatives. Since yields rose in 2022, asset managers have traded more futures to gain synthetic exposure to Treasuries, while insurers and pension funds are using more interest rate swaps to manage duration sensitivity.

Although the trend has raised concerns that higher leverage could amplify volatility and worsen a selloff, the committee concludes that expressing duration through derivatives enhances demand for Treasuries by broadening market access and expanding intermediation capacity. To support Treasury demand further, it recommends easing bank balance-sheet constraints, including exempting Treasuries from leverage ratios, and expanding access to the repurchase agreement market while reviewing accounting, tax and operational hurdles around repo.

In our earlier article on rising long-term U.S. borrowing costs, we explained how higher Treasury yields are tightening financial conditions by lifting mortgage rates and increasing the government’s interest burden as annual deficits near $2 trillion. We also noted that expectations of sustained heavy Treasury issuance—alongside massive debt sales to fund AI infrastructure—are intensifying competition for long-duration capital and complicating the fiscal outlook amid political gridlock.

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