AI bond supply seen pushing Treasury yields higher

AI-related borrowers account for an outsize share of the roughly one-third of this year's investment-grade corporate bond supply issued at the long end, according to an Insurance AUM Journal analysis published Oct. 30.

The bonds funding AI capital spending now compete with government debt for the same investor demand, most acutely among higher-quality issuers. Government supply had been rising since the COVID-era fiscal support of early 2020. The analysis expects supply from both sources to push yields on high-quality government bonds, Treasuries included, higher, and to widen spreads on credit-risky paper such as hyperscaler and data-center debt, lifting its all-in yield.

For insurers, long-dated corporates match long-dated liabilities, so a steeper credit curve should mean new long paper clears at wider spreads than shorter bonds from the same issuer. That raises entry yields on assets a general account needs to buy and adds price risk to existing long corporates if Treasury yields rise. Credit quality and duration become separate decisions: the analysis treats the move as a supply and relative-valuation question, not a judgment on issuers' fundamentals.

Steve Boothe, who heads global investment-grade fixed income, said the steepening is a supply and relative-valuation issue rather than a broad deterioration in credit quality. "Approximately one-third of year-to-date investment grade corporate supply has been in the long end of the curve, with an outsize contribution from AI-related issuers," he said.

Boothe said the near-term spending on data centers, chips, power and related infrastructure supports U.S. investment and growth, but the longer-run test is whether productivity gains and future cash flows justify the capital. If returns disappoint or the cost of capital rises, capex could slow quickly. Boothe also argued in the same journal this month, as Private Wealth Daily reported, that private markets must absorb more duration supply.