Big Tech's borrowing binge gives Treasury bonds competition

The big picture: Treasury yields are rising for many reasons, including inflation concerns, worries over the Federal Reserve's credibility and — especially — the mounting U.S. debt load.

• It's also a global phenomenon: Government borrowing costs are rising across most of the other G7 nations.

The latest: The Treasury Department is reportedly considering a larger intervention in the bond market.

• The administration's initial attempt at this was criticized last night in a widely shared Wall Street Journal op-ed by famed investor Stanley Druckenmiller, a former Soros hedge fund colleague of Treasury Secretary Scott Bessent, who criticized the administration for interfering in the healthy workings of the market.
• So it's perhaps not surprising that the AI piece of the story can get overlooked amid all the drama.

How it works: For years, tech companies were cash-rich players that didn't need to borrow much money.

• Now, hyperscalers like Google, Meta and Microsoft need a cash mountain to build out AI infrastructure. And they're not alone. Energy companies and chip manufacturers are also borrowing.
• They're all turning to the bond market to make it happen.
• At least one of these companies — Microsoft — has a higher credit rating than the U.S. government.

By the numbers: U.S. investment-grade corporate bond issuance reached roughly $1.36 trillion through July, up about 27% from the same period last year, per data from SIFMA.

• The pace of borrowing could eclipse the previous record — $1.85 trillion during the turmoil of 2020.

The intrigue: Private foreign investors spent $390 billion, on net, on U.S. corporate bonds over the past 12 months, slightly more than the net $329 billion they shelled out for U.S. Treasury notes and bonds, per an analysis from Yardeni Research of LSEG and Treasury data.

• Meanwhile, official foreign entities like central banks and finance ministries have become less willing to buy Treasury bonds, as Axios' Matt Phillips wrote last week — leaving more of the market to hedge funds.

Zoom in: Typically, all this corporate debt would mean higher interest rates to attract buyers.

• Yet corporate borrowing costs haven't risen much relative to Treasury yields — instead, Treasury yields have done the moving.
• "The market has adjusted not through higher corporate borrowing costs relative to Treasurys, but through higher Treasury yields themselves," per Yardeni.

• "In short, the AI revolution is producing a classic crowding-out effect, causing Treasury yields to rise."

What they're saying: "Crowding out" has become the shorthand for all this — even though it was historically used to describe when government borrowing pushes out private investment.

• "The flood of corporate supply is competing directly with long-dated Treasurys for investor demand, adding upward pressure to long-term yields," says Yulia Alekseeva, head of fixed income at MissionSquare Investments.
• "There's crowding out," says Tony Rodriguez, head of fixed income strategy at Nuveen. "Greater demand for capital is pushing up rates for everybody globally."

Yes, but: Don't expect a "full rotation" away from Treasury bonds into corporate bonds. "The corporate market simply isn't deep enough to absorb that kind of shift," Alekseeva says.

• Institutional investors typically face limits "on how far they can move down the credit spectrum."

Flashback: The AI investment boom often gets compared to the rush of money that went into funding the railroads in the late 1800s. Then, as now, investors went bananas for bonds to get in on the action.

• Back then, however, the U.S. was pulling back on borrowing in the aftermath of the Civil War.
• Now, both the government and the private sector are borrowing more.

The bottom line: This time, the U.S. has to share.