As the Treasury Department looks to ensure investors continue absorbing the fresh supply of debt it must sell, growing competition from companies issuing their own bonds could send rates higher, according to Apollo Chief Economist Torsten Slok.
That’s as the AI boom increasingly sends companies, including hyperscalers and adjacent firms, to the bond market to fund massive investments in data centers and other infrastructure.
“The significant increase in hyperscaler issuance raises questions about who will be the marginal buyer of IG paper,” Slok said. “Will it come from Treasury purchases and hence put upward pressure on the level of rates? Or might it come from mortgage purchases, putting upward pressure on mortgage spreads?”
That’s $110 billion less than the deficit during the same period a year earlier as tariffs helped revenue outpace spending. But the Supreme Court could strike down President Donald Trump’s global tariffs soon, and this year’s tax season should see a surge of refunds to account for new tax cuts under the One Big Beautiful Bill Act.
“The bottom line is that the volume of fixed-income products coming to market this year is significant and is likely to put upward pressure on rates and credit spreads as we go through 2026,” Slok said.
To make sure there’s sufficient demand among bond investors, Treasury yields must remain attractive relative to the competition. Failure to draw enough investors raises the risk of so-called fiscal dominance, or when a central bank must step into to finance widening deficits.
“The preconditions for fiscal dominance are clearly strengthening,” she said, noting debt is on a steep upward trajectory toward 150% of GDP over the next three decades.
That threatens to turn the U.S. financial system more fragile in times of market stress, according to Geng Ngarmboonanant, a managing director at JPMorgan and former deputy chief of staff to Yellen during her tenure at Treasury.
Foreign governments accounted for more than 40% of Treasury bond holdings in the early 2010s, up from just over 10% in the mid-1990s, he wrote in a New York Times op-ed last month. This reliable bloc of investors allowed the U.S. to borrow vast sums at artificially low rates.
“Those easy times are over,” he warned. “Foreign governments now make up less than 15% of the overall Treasury market.”
