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

The bond market has a supply problem — and it’s pushing yields higher By Huileng Tan You're currently following this author! Want to unfollow? Unsubscribe via the link in your email.

The Treasury selloff is raising the stakes for stocks, borrowers, and the broader economy. Michael Nagle/Bloomberg/Getty Images 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." Read next Huileng Tan You're currently following this author! Want to unfollow?

Unsubscribe via the link in your email. Huileng Tan is a senior reporter based in Singapore, covering markets, the global economy, commodities, and investing. Her reporting focuses on how shifts in money, demographics, technology, and policy are reshaping businesses, wealth, and everyday life around the world.

Since joining Business Insider in 2021, she has covered everything from commodity booms and investor trends to China's economy, the AI trade, and the forces driving global markets. Before joining Business Insider, she reported for CNBC, Dow Jones, ICIS, and The Wall Street Journal. In 2018 and 2019, she won the Singapore Exchange Orb Awards for Story of the Year – Derivatives for her reporting on the global commodities and derivatives markets.

Reach her at htan@businessinsider.com . Interest Rates Economy

Source: Business Insider