Among the many potential disadvantages of allowing the national debt to grow too high was that the federal government would absorb so much capital that businesses would not be left with enough. Today, the U.S. debt stands at $40 trillion, the federal budget deficit is on track to hit $2 trillion this fiscal year, and debt service costs alone amount to $1 trillion a year. That’s a lot of money the Treasury Department has to raise from the bond market, which is also a key source of funding for corporate giants. But AI hyperscalers, so far, are still able to issue much of their own debt in the mad rush to buy chips, build data centers and establish other infrastructure. In fact, even Treasury Secretary Scott Bessent, who has billed himself as America’s top bond seller, has noted the eagerness with which AI companies offer debt, regardless of the cost of borrowing. “We’re also seeing big corporate issuances. And a lot of those corporate issuances, I would say, are almost performance-agnostic, because companies believe that the development of AI, the returns on that are going to be very high. They don’t really care what they’re paying for,” he said recently. U.S. investment-grade corporate bond issuance totaled about $1.7 trillion so far this year through July, about 27% above last year’s pace and on track to surpass $2 trillion for the first time, according to Wall Street veteran Ed Yardeni. Such a massive corporate debt rush would normally require yields to offer a larger premium over risk-free bonds to attract enough buyers. But in the case of AI-related bonds, demand has been so high that the yield spread has remained compressed, barely widening to generate an additional premium, he noted in a note on Monday. “As a result, the market has adjusted not through higher corporate borrowing costs relative to Treasuries, but through higher yields on Treasuries. Capital flowing into corporate bonds is capital not flowing into Treasuries, and Treasury yields have had to rise to balance the market,” Yardeni explained. “In short, the AI revolution is producing a classic crowding out effect, causing Treasury yields to rise.” Higher yields could eventually fuel a feedback loop in which rising debt-servicing costs further expand deficits and add even more to the U.S. debt pile, which in turn pushes yields even higher. To be sure, the rise in Treasury yields has been attributed to a variety of factors other than the AI debt orgy. They include massive federal budget deficits with no end in sight, higher oil prices due to the Iran war, and a robust U.S. economy that continues to put upward pressure on inflation. But Yardeni noted that data on international capital flows show that net purchases of U.S. corporate bonds by foreign private-sector buyers have exceeded their purchases of Treasury debt over the past year. Jurrien Timmer, global macro director at Fidelity Investments, said in X that “the reverse shift in the corporate bond market has even caught the attention of the Treasury Secretary.” It has also caught the attention of Federal Reserve Chairman Kevin Warsh. In his speech at the Jackson Hole conference on Friday, he nodded toward the debt boom and said, “Ever-expanding funds of capital are being invested in AI-related infrastructure of all kinds.” That’s because private credit is also funding the AI boom, while chipmaker Nvidia is even tapping its balance sheet to back AI deals. So-called hidden loans have also skyrocketed: one count puts them at $1.65 trillion. But markets are showing some signs of fatigue, after absorbing the deluge of debt in such a short time, S&P Global warned last month, noting that hyperscalers are paying a higher premium compared to risk-free bond yields. “Market participants are increasingly wary of the rapid increase in leverage of issuers previously characterized by strong and reliable cash flow,” the report says.
