Economist Mohamed El-Erian says a surge of bond issuance from hyperscalers and governments is competing with U.S. Treasuries for a shrinking pool of buyers, driving interest rates higher. Traditional Treasury buyers such as China, Japan and the Gulf states are pulling back, and Norway's sovereign wealth fund has proposed cutting its Treasury holdings from 70% to 50%.
Mohamed El-Erian told CNBC that governments, hyperscalers and companies are issuing bonds faster than reliable buyers can absorb them, and that imbalance is pushing rates up. He argued the pressure stems from supply and demand rather than inflation or Fed credibility.
Hyperscaler bond issuance jumps
The AI buildout is increasingly funded by debt rather than cash flow. Alphabet, Amazon, Meta, Microsoft and Oracle have issued $132 billion in bonds so far this year to sustain their pace of AI spending. By comparison, the five companies issued about $35 billion of debt annually from 2020 to 2024.
Reliable Treasury buyers pull back
Investors are demanding higher returns to hold U.S. government debt as fallout from the US-led war against Iran feeds inflation worries, particularly around gas prices. El-Erian said "China, for geopolitical purposes, is no longer as willing." Japan and the Gulf countries, he added, have domestic issues of their own limiting their appetite.
Norway's sovereign wealth fund manager, Norges Bank Investment Management, has proposed cutting its U.S. Treasury holdings to 50% of its bond portfolio from 70%, a shift that would trim its Treasury exposure by roughly $80 billion. As central banks and other price-insensitive buyers step back, Benn Steil and Yuma Schuster of the Council on Foreign Relations wrote that Treasuries must increasingly be absorbed by household and fund investors, who demand higher yields in response to fiscal indiscipline and inflationary pressure in the bond market.
Higher rates reach household budgets
The strain in the bond market is already reaching consumer costs. Mortgage rates tend to track the ten-year Treasury yield, adding pressure to a housing market where inventory is already scarce. Auto loans, tied more closely to five-year Treasuries, are affected too: car payments averaged $770 per month in July, pushing some buyers toward longer loan terms to keep payments manageable.
Source: CNBC
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