AI-Fueled Bond Wave Pushes US Treasury Yields to 22-Year Highs

The US Treasury yields have reached their highest levels in 22 years, driven by an 'AI bond wave' that is flooding the market with long-duration debt. This has pushed mortgage rates to nearly 7% for American homebuyers, a two-year high. The Federal Reserve's rate hike last week was triggered by inflation concerns, but it also accelerated the bond market selloff.

The six largest tech companies - Amazon, Alphabet, Meta, Microsoft, Oracle, and others - are behind this surge in AI bond issuance. They are using long-term debt to fund their expansion in artificial intelligence infrastructure, which is driving growth expectations high. However, this also means that investors must be compensated more for locking up capital in these long-dated bonds.

The 'term premium' mechanism ties the Treasury yields to the supply and demand of long-duration debt. When a wave of new long-duration supply hits the market, investors need higher returns to absorb it. The AI bond issuers are averaging premiums of 12 basis points above secondary market prices to get deals done.