AI debt tsunami is coming; September is the testing period for U.S. debt.

As the U.S. Treasury market takes a brief breather, a larger pressure test is quietly approaching. The U.S. Treasury Department announced yesterday that it would expand the scale of its long-term Treasury buyback program, temporarily alleviating the market's tension as the yield on the 30-year Treasury bond breached 5.3%. However, market participants warn that the impact of this intervention may not last longan AI infrastructure financing wave driven by tech giants is expected to surge after the Labor Day holiday in September, which could see U.S. investment-grade corporate bond issuance soar to $200 billion, potentially delivering a new shock to an already pressured Treasury market. Nicholas Elfner, co-director of research at Breckinridge Capital Advisors, noted, "The post-Labor Day back-to-school season has traditionally been a busy period for the U.S. investment-grade corporate bond primary market." He pointed out: With the surge in massive transactions among mega-corporations, a total issuance of $200 billion in September seems achievable, depending on the delicate balance between supply and demand, as well as a certain degree of stability in the Treasury market. Several asset managers indicated that U.S. investment-grade corporate bond issuance has increased by 38% year-on-year so far this year, with the total expected to hit a historical record of $2.1 trillion, much of which is flowing into AI-related capital expenditures. Andrzej Skiba, head of fixed income at RBC Global Asset Management, stated that the current supply of AI-related bonds is "approaching the limit that won't disrupt the market." This supply wave, combined with the expanding U.S. fiscal deficit, rising inflation expectations, and uncertainty surrounding Federal Reserve policy, is reshaping the supply-demand dynamics in the fixed income market. The Treasury Department's intervention is met with skepticism regarding its effectiveness. This week, the U.S. Treasury announced it would significantly expand the long-term Treasury buyback program to be launched next month, which immediately boosted market sentimentthe U.S. stock market rebounded from three consecutive days of declines, gold and Bitcoin rose in tandem, and the yield on the 10-year Treasury bond also dipped slightly. However, several analysts expressed caution over the impact of this intervention. John Briggs, head of U.S. interest rate strategy at Natixis, pointed out that the planned buyback scale is less than 3% of the outstanding long-term debt, and lower than the expected 30% of this year's issuance. "More importantly, the signal is significantthe market now understands some of the Treasury Department's pain points," he said, "but the long-term structural pressures remain unchanged and will continue to push yields higher." Some market participants view this buyback as an attempt by authorities to suppress long-end rates. Nevertheless, the yield on the 10-year Treasury bond remains around 4.64%, significantly higher than the 4% level seen at the onset of the Iran War in March. The AI financing craze is reshaping the corporate bond market. The arms race for AI infrastructure has become the core driver of the current surge in corporate bond issuance. Microsoft Corporation (MSFT.US), Alphabet (GOOGL.US), Amazon.com, Inc. (AMZN.US), Meta (META.US), and Oracle (ORCL.US) have been continuously issuing large amounts of long-term corporate debt since last fall to fund investments in data centers, advanced chips, and AI services. Analysts at Goldman Sachs Group, Inc. expect that by 2026, AI-related debt (including investment-grade, high-yield, and leveraged loan markets) will reach $322 billion. However, as of late July, this total was approaching $500 billion. JPMorgan predicts that by 2026, funding for mega-scale cloud computing and data centers will reach $400 billion, a significant increase from the previous estimate of $320 billion at the end of last year. These tech giants have also extended their reach into markets they typically avoid, including the euro-denominated investment-grade bond market. According to data from Goldman Sachs Group, Inc., mega-scale cloud companies accounted for 21% of total investment-grade bond issuance in Canada and 19% of Swiss franc-denominated investment-grade corporate bonds. Steve Boothe, a global investment-grade bond manager at T. Rowe Price, cautioned: "If next year mirrors this year's situation, volatility in the bond market will further intensify in the second half, and yields will continue to rise." Imbalance in supply and competitive pressure. The massive supply of AI corporate bonds is forming direct competition with long-term Treasuries. Skiba pointed out that AI corporate bonds typically have longer maturities, with some issuers' credit ratings even surpassing that of the U.S. federal government, creating a substitution effect for long-term Treasuries. He also noted that tech companies are exploring off-balance-sheet financing channels, including large financing for specific data center projects and innovative structures such as chip collateralization. Brij Khurana, a fixed-income portfolio manager at Wellington Management, described the current situation as a "flood"new transactions emerge daily, sourced not only from the mega-scale cloud companies themselves but also from various companies in the AI supply chain. Khurana also pointed out that as these companies allocate vast financing funds for AI capital expenditures, the macroeconomy "is unlikely to enter a recession," which is favorable for stock market sentiment but compresses the attractiveness of the bond market. Henry Song, a portfolio manager at Diamond Hill, directly highlighted the current core contradiction: "From a bond investor's perspective, the key is where to put money to create value." Risk accumulation, historical shadows emerge. Beneath the surface of market prosperity, risk signals are gathering. Although rising yields this year have somewhat suppressed the widening of credit spreads, once the uptrend in Treasury yields is curtailed, the risk of corporate bond sell-offs will rise in tandem, further pushing up credit spreads. Some investors have expressed concerns about the similarities between the AI financing craze and the Internet bubble of the 2000s, wary that the speed of capital deployment may outpace the ability to monetize business models. Hank Smith, chief strategist at Haverford Trust, is particularly focused on the resurgence of off-balance-sheet financing models, likening it to the mid-2000s banking industry"ultimately ending with a heavy price." In addition, inflation pressures cannot be overlooked. Driven by increased energy prices due to the Iran War, the UK's July inflation rate surged to 2.9%, while the Eurozone's inflation rate also climbed to 2.9%, with the market expecting a 96% probability of a 25 basis point rate hike by the European Central Bank in September. In the U.S., new Fed Chair Kevin Warshs policy outlook remains highly uncertain, coupled with the U.S. total debt exceeding $40 trillion, which poses continuous pressure on long-end rates. Nicholas Elfner of Breckinridge Capital Advisors concluded, stating that whether corporate bond issuance can reach the expected $200 billion in September "will depend on the delicate balance between supply and demand, as well as the overall stability of the Treasury market." Against the backdrop of unclear prospects for AI investment returns, this balance's fragility may face a true market test in September. This article is reprinted from "Wall Street Insight," edited by Jiang Yuanhua.