When Washington and AI Compete for Capital

The simultaneous financing of large U.S. deficits and an AI-driven corporate investment boom is pushing the price of long-term capital materially higher.

• In 2020, the U.S. federal deficit reached $3.1 trillion, yet the 10-year Treasury yield remained near historic lows; today, the 10-year yield is near 5% despite continued heavy government borrowing.
• Treasury issuance excluding bills has reached nearly $5 trillion over the past 12 months, while corporate debt issuance has risen to roughly $2.6 trillion.
• J.P. Morgan estimates hyperscalers will spend about $700 billion on capital expenditures in 2026, and their bond issuance increased from approximately $17 billion in 2024 to $109 billion in 2025 and $194 billion in the first half of 2026.
• The AI investment cycle requires financing for data centers, chips, power generation and networking infrastructure, adding corporate demand for the same bond-market capital sought by the government.
• In five months of 2020, the Federal Reserve increased its Treasury holdings by roughly $1.8 trillion, absorbing much of the additional duration; there is no comparable central-bank absorption today.

Takeaway: Higher long-term yields reflect the combination of persistent fiscal borrowing and capital-intensive corporate investment, although inflation, Fed policy, growth expectations and the term premium also remain important rate drivers.