The bond market has a supply problem — and it’s pushing yields higher

A global bond rout is deepening as investors worry there's simply too much debt hitting the market.

Alphabet, Amazon and other AI giants have issued $220 billion of debt this year to fund investments.

The Iran war could add to US borrowing, just as federal debt has topped $40 trillion for the first time.

The bond market's latest selloff has plenty of obvious culprits, from stubborn inflation to renewed fighting with Iran.

Investors should add another one to the list: There are a lot of bonds to buy, as Washington borrows heavily and tech giants tap debt markets to fund the AI boom, according to Macquarie Group.

The bond selloff deepened Wednesday, sending the 10-year Treasury yield to a near three-year high of 4.81%. The rout has spread around the world, with Japan's 10-year yield above 3%, a 30-year high.

The immediate worry is that the Middle East conflict will keep energy prices elevated and add to inflation. But the war could push Treasury yields higher through another channel: by adding to government borrowing at a time when federal debt has already crossed $40 trillion for the first time.

Macquarie doesn't see the selloff as a sign that investors are losing faith in US debt. The simpler problem, the strategists say, is the sheer number of bonds hitting the market.

The AI boom is contributing to that supply. Hyperscalers Alphabet, Amazon, Meta, Microsoft, and Oracle have issued $220 billion of debt this year to fund investments, including data centers and AI models, according to LSEG data.

That leaves government and corporate debt competing for a limited pool of savings.

"Yields are higher because traders worry about the orderly absorption of a higher supply of bonds indefinitely, especially with the existing surfeit of corporate high-grade bonds coming to market in Q3 and Q4," strategists Thierry Wizman and Gareth Berry wrote.

Macquarie expects AI-driven spending by hyperscalers to keep growing over the next two years, which should keep corporate bond sales high. With personal savings relatively low, the strategists said yields should stay elevated, all else equal.

The effects reach far beyond bond traders. Bond yields help set borrowing costs across the economy, from mortgages to student and car loans. When rates rise, borrowing and spending become less attractive, which can slow economic growth.

Higher yields can hurt stocks, too, because they make investors less willing to pay high prices for companies' shares. Macquarie said rising yields are already proving to be the stock market's "undoing."

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