Prominent economist Mohamed El-Erian argues hyperscalers and national governments are issuing a flood of bonds to keep up their rapid spending velocity onto fewer buyers. Those straightforward circumstances are pushing bond yields up.
“If you look at the amount of issuance that’s coming from governments, from hyperscalers, from companies, it far exceeds what you can count on in terms of reliable buyers, and that’s why there’s been pressure on interest rates, El-Erian told CNBC in an interview on Friday. “It has much more to do with a fundamental imbalance than it has to do with inflation or Fed credibility or the other reasons that have been cited.”
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He continued: “This is simple supply and demand, and we have a massive increase in issuance by governments and hyperscalers.”
Indeed, the latest chapter of the AI buildout will be fueled by a borrowing binge among tech giants instead of them drawing on cash flows. According to investment management firm Vanguard, five so-called hyperscalers —Alphabet, Amazon, Meta, Microsoft, and Oracle — have issued $132 billion in bonds so far this year to maintain the swift speed of the AI buildout. By comparison, the five companies issued about $35 billion of debt annually from 2020 to 2024.
‘Reliable buyers’ of U.S. Treasuries are under strain
What’s fueling the current bond sell-off is simple: Investors want higher returns upfront in exchange for holding onto the U.S. government’s debt. Investors are increasingly nervous about the fallout of the US-led war against Iran, which set off another wave of inflation particularly for gas prices. They’re also wary about the rapid pace of AI development and whether the staggering spending levels will yield profits that match.
“What I do think is going on is that the reliable buyers and holders of U.S.Treasuries are under pressure,” El-Erian told CNBC. “China, for geopolitical purposes, is no longer as willing. Japan and the Gulf countries have domestic issues.”
Norway is also catching Wall Street’s attention. On Friday, Norges Bank Investment Management — the body managing the world’s biggest sovereign wealth fund — sent a letter to the Norwegian Finance Ministry pitching to slash the size of its government debt holdings to 50% from its current level of 70%. NBIM seeks to slash the size of its U.S. Treasury holdings by roughly $80 billion, according to Reuters.
